Pernod to Buy Absolut Vodka Maker for EU5.28 Billion

March 31 – Pernod Ricard SA, the world’s second- largest liquor company, agreed to buy Vin & Sprit AB from Sweden’s government for 5.28 billion euros ($8.34 billion) to gain the Absolut vodka brand and take on Diageo Plc’s Smirnoff in the U.S.

Pernod beat out rivals including Fortune Brands Inc. and the billionaire Wallenberg family with its bid. Prime Minister Fredrik Reinfeldt, in power since 2006, put Vin & Sprit up for sale to reduce the state’s involvement in the economy and pay debt.

Pernod dropped as much as 5 percent in Paris trading today on concern that the company may be paying too much. The purchase will make the producer of Martell cognac the second-biggest spirits seller in the U.S., the world’s largest vodka market by value. Absolut controls about 9 percent of the U.S. vodka market by volume, more than any brand except Smirnoff.

“It’s a good operation, but the price is high,” said Salah Seddik, a fund manager at Richelieu Finance, which oversees $6.3 billion. “This will increase the debt level of Pernod, even though it’s not a worrisome level.”

Pernod fell as much as 3.43 euros to 64.66 euros in Paris trading and was trading down 4.3 percent at 65.14 euros at 1:11 p.m. local time. The shares have slid 18 percent this year, cutting the company’s market value to 14.3 billion euros.

Increased Borrowings

Pernod, the maker of Chivas Regal whiskey, said it is paying 20.8 times earnings before interest, taxes, depreciation and amortization, prior to any savings. The company paid 13 times operating profit for Allied Domecq Plc in 2005.

Fortune Brands said in a statement it “didn’t see the appropriate return for our shareholders at the announced price.”

In addition to the purchase price, Pernod is assuming debt of 346 million euros, taking the total cost of the transaction to 5.63 billion euros, spokeswoman Florence Taron said. The acquisition is being fully funded by debt and will almost double the company’s net borrowings to 12 billion euros, Pernod said.

“The quick bidding process indicates Pernod’s offer was substantially above the other bidders,” said Lars Soederfjell, head of equity strategy at ABG Sundal Collier in Stockholm. “The Swedish government is being very well paid for the company.”

The transaction means Pernod’s contract to distribute Stolichnaya vodka will end once the brand’s Russian owner SPI Group has found a replacement. The French company plans to sell Plymouth Gin and some of V&S’s other smaller brands.

Cost Savings

Sweden is selling Vin & Sprit to dispose of assets worth at least 200 billion kronor ($34 billion) by the end of 2010. London-based Diageo, the world’s biggest distiller, dropped out of the running in February after agreeing to form a joint venture with the Dutch producer of Ketel One vodka. Other bidders included Investor AB, the Wallenberg family’s holding company.

Bengt Baron will remain chief executive officer of V&S after the takeover and the company’s headquarters will stay in Stockholm, Pernod Managing Director Pierre Pringuet said today.

Pernod forecast as much as 150 million euros of annualized pretax cost savings from the transaction, which it aims to close in the middle of 2008. The purchase doesn’t include V&S’s 10 percent stake in Fortune Brands’ Beam Global Spirits & Wine Inc.

Fortune said today it plans to repurchase the stake in the unit from the Swedish government and will also seek to buy back as many as 15 million shares of common stock.

“While we had hoped to purchase Absolut at the right price, we didn’t hesitate to put our shareholders’ interests first,” Fortune’s President and Chief Executive Officer Bruce Carbonari said today in an e-mailed statement.

U.S. Distribution

Spirits and wine makers have spent about $27 billion to take over competitors since the start of 2005, figures compiled by Bloomberg show. Before Vin & Sprit was sold, analysts had said the company might fetch as much as $6 billion.

Pernod’s bid was “among the highest multiples paid for a company in this business,” Financial Markets Minister Mats Odell said on a conference call. The French company raised the final offer from what it initially indicated it would pay, he said.

Odell added that Vin & Sprit “won’t be split” and that he expects to complete the sale of the Beam stake in months.

“This is a good deal for both sides,” Trevor Stirling, an analyst at Sanford C. Bernstein in London, said today by telephone. “The price is higher than expected, but synergies are also higher than expected.”

Absolut is distributed in the U.S. by Future Brands, a joint venture between Fortune and Vin & Sprit. The vodka is distributed elsewhere by Maxxium, to which both companies also belong along with French cognac maker Remy Cointreau SA and Edrington Group, the Scottish distiller of Famous Grouse and Macallan whiskey. Remy is leaving the venture this year.

U.S. Market

Pernod said that the U.S. agreement between V&S and Fortune Brands is in place until the start of 2012. Pernod plans to exit the Maxxium venture “at the latest” two years after closing the acquisition with “minimal contractual costs.”

The Swedish distiller introduced Absolut in 1979 and now sells almost 11 million cases a year of the vodka, which is made from winter wheat. The U.S. accounts for half of sales. Vin & Sprit has fueled demand with flavored varieties such as raspberry and advertisements designed by artists that began when Andy Warhol painted an Absolut bottle in 1985.

While sales of Absolut gained 9 percent by volume in 2007, Vin & Sprit’s revenue is stagnating as the dollar’s drop erodes the value of U.S. sales on conversion to kronor. Fourth-quarter revenue was little changed at 2.96 billion kronor.

Absolut accounts for about 40 percent of Vin & Sprit’s sales by volume. The rest comes from alcoholic beverages including Plymouth gin, which must be distilled in the English city of the same name, and Cruzan rum, which has been made since 1760 on the Caribbean island of St. Croix. The company also owns the Level, Fris and Luksusowa vodka brands.

JPMorgan Chase & Co., Deutsche Bank AG and PK Partners were Pernod’s financial advisers.

Retailers try new ways to counter soaring rentals

Fashion retailer ETAM Future, a joint venture between the Future Group and French retailer ETAM, has closed three shops in Delhi, Surat and Ahmedabad owing to high rentals.

For the same reason, Liberty Shoes has put plans to launch its high-end brand “Pairs” on hold.

Indiabulls, the new entrant in retail with its brand Trumart, recently closed five stores, one each in Thane, Jaipur and Pune and two in Ahmedabad. The company has opened five new stores (two each in Ahmedabad and Pune and one in Jaipur) with better deals with developers.

Sky-high rentals are forcing retailers to explore new ways to stay afloat. Many have done the obvious thing by shifting to cheaper locations or simply downing their shutters. But others are renegotiating deals with developers to ensure business sustainability.

New deals like longer “rent-free” periods, no “lock-in” clauses in agreements and revenue-sharing deals with developers are becoming common.

“Today, 90 per cent of retailers are not making money. Many of them are earning only half of what they should make to break even. Zooming realty costs is the main culprit,” said a property consultant.

A cross-section of retailers Business Standard spoke to said rentals should account for 10 to 12 per cent of sales to make business sense but now make up 20 to 30 per cent of sales in many cases.

“We have decided not to pay more than 20 per cent of our sales as rent. How can one pay rents that are equivalent to total sales in some high streets?” said Jaydeep Shetty, chief executive of ETAM Future Fashions.

Retailers have started bargaining for more with developers. “We do not sign up for a lock-in period. If you do not make money in a place, what is the point in staying there,” said Subir Ghosh, chief executive of music and lifestyle retailer Planet M.

Most retailers sign up for three-year lock-ins that require them not to vacate the premises in that time-frame.

Revenue-sharing agreements are also catching up as footfalls wane in many malls in the country. French brand Lacoste has already opted for such arrangement with three of its stores.

“As our occupation costs go up, the revenue sharing model can help sustain operations, especially in high streets,” said Vikas Gupta, managing director of Lacoste India.

Retailers that are unwilling to opt for revenue sharing are looking at new retail formats. Arvind Brands, for instance, plans to launch multi-brand stores for its international brands.

“Multi-brand outlets are cost-effective since they make a 10 to 15 per cent difference in sales per square foot. It will also help improve footfalls because many brands are available under one roof,” said J Suresh, chief executive of Arvind Brands.