Pernod Ricard Acquires Sweden’s Vin & Sprit

By Meera Bhatia

Bloomberg

Published: April 1, 2008 (Issue # 1361)

OSLO — Pernod Ricard SA, the world’s second-largest liquor company, agreed on Monday 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 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 Monday 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, 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.

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.

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 Monday.

Fortune said Monday 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.

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 Monday 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.

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.

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.