Pernod Ricard is currently seeking answers to a market environment that is complicated, to say the least. The rapprochement highlights the desire of two struggling groups to strengthen their positions. Both had already announced restructuring plans last year to address costs in the face of external pressures.
The entire sector has seen its valuations severely revised since 2022. On the eve of the announcement, both groups had lost over two-thirds of their market capitalization compared to their peaks. Meanwhile, P/E multiples dropped from 20x to 11x for the French firm and from 30x to 15x for the American company.
Brown-Forman's valuation has thus fallen back to its lowest levels since the 2008 financial crisis. This justifies Pernod Ricard's offensive, despite the risk involved in a merger of this magnitude in such a degraded market.
Such an operation would not solve both portfolios' growth issues. However, it could offer both sides complementarities and synergies that would provide a stronger foundation to face the structural challenges threatening them. Together, the new entity would generate nearly €15bn in revenue, enough to match Diageo, the world leader.
Brown-Forman would provide Pernod Ricard with a much more solid foothold in the United States, where the French group lacks the scale to compete with Diageo. This would consolidate a clear number two position in the world's leading spirits market, where bargaining power is particularly useful.
The interest is mutual. Pernod Ricard possesses a much more international distribution network, an obvious asset for Brown-Forman's global expansion. Here, China comes to mind, but particularly India. Pernod is well-established there with its Indian whiskies and could help American whiskey finally penetrate a massive market that is vital for growth.
There is also a brand portfolio logic. Brown-Forman generates approximately 70% of its sales from American whiskey, a missing piece in Pernod Ricard's lineup, especially as it is a spirit that has shown significant resilience.
Nevertheless, the agreement between the two founding families remains a decisive condition. At the American firm, the Brown family is highly active on the board and retains the majority of voting rights. Consequently, the ambition of Alexandre Ricard is paramount; he leads the group but is also the only family member exercising real influence within the board. This question, as well as the level of premium that would need to be offered to Brown-Forman shareholders, are certainly key points in the negotiations.
While cooperation between these two iconic families may make the transaction complex to finalize, it could also be a strength in the future. Analysts at Jefferies highlighted the strength of the families' alignment on their very long-term visions, which is indispensable in this sector.
While investors largely welcomed the news, the majority of analysts remain skeptical about the potential for value creation for Pernod Ricard shareholders. First, it is clear that Pernod Ricard will have to increase its capital. The group's net debt already reaches €11.2bn and represents 3.8x EBITDA, the least reassuring ratio in the sector.
Analysts at Oddo BHF have modeled the possible effects of the operation on EPS under several assumptions regarding the premium and financing structure. In all cases, the conclusion is that the operation would be dilutive for Pernod Ricard shareholders. With an all-stock offer, and excluding synergies, the impact would be at least -14% on EPS. With a 20% premium granted to Brown-Forman, the dilution would climb to -20%.
This tie-up is therefore not incongruous on a strategic level. At these prices, the two groups may be facing a unique opportunity to merge. Between delicate governance issues, high execution risks, and short-term dilution for the French group's shareholders, this operation logically raises the question of the risk undertaken.
