Pernod Ricard To Meet Activist Elliott Ahead Of Earnings Update: Sources
Pernod Ricard will meet activist hedge fund Elliott this month as the family-backed spirits firm faces pressure to improve its margins, sources familiar with the situation said.
Although chief executive Alexandre Ricard is expected to present his new strategy plan later this year, some analysts expect Pernod Ricard to give some direction on margins when it publishes first-half earnings on 7 February.
Billionaire Paul Singer's Elliott, which is being advised by French business and political establishment insider Alain Minc, is hopeful that Ricard will deliver some of the changes it has proposed, including improving investor returns, one source said.
The activist fund, which has become more active in Europe in recent years, revealed in December that it had spent around €930 million ($1.1 billion) building a stake of just over 2.5% in Pernod Ricard and called on it to improve profit margins and governance.
Elliott, which the first source said views its dialogue with Pernod Ricard as constructive, has called for some €500 million of cost cuts, suggested options such as merging with another spirits company and said its board needed more independence as many directors have Ricard family links.
But Ricard had inherited "a very, very heavy structure in terms of inertia and culture," the same source said.
"The CEO, no matter how good he is or how good his intentions are, cannot single-handedly change the direction of a company or improve its culture," the source added.
A top-20 investor in Pernod Ricard cited its share price as evidence the company was moving in the right direction under Ricard, the 46-year-old grandson of the company's founder, who took over in 2015 and made sales growth his top priority.
"I often think the market is the best judge of CEO performance... (looking at) the forward PE (price-earnings) of Pernod and arguably its best peer, Diageo, Pernod always traded at a discount, but is now at the premium," he said.
Elliott met Ricard, who is expected to attend this month's meeting, on 22 November after an annual meeting at which he said he was preparing a three-year strategic plan to accelerate growth.
There have been follow-up technical meetings between the two sides, but some doubt that Elliott can change much as the Ricard family controls 15% of Pernod Ricard's shares and 21% of voting rights, while long-time investor GBL owns a 7.5% stake and has said its supports the firm's strategy.
Meanwhile, the French government warned in December it wanted "big French companies to have stable and long-term shareholders" and did not want them to be "subject to pressure from shareholders who want short-term profitability"
While Pernod has said it valued "constructive input" from shareholders, it has defended its long-term value strategy, which, helped by a recovery in Chinese demand for premium spirits, saw sales growth rise to 6% in 2017/18.
Existing Efficiency Plan
There have been cost cuts under its existing efficiency plan, but some analysts have said more could be done at Pernod Ricard, which had a profit margin of 26.2% in 2017/18 against rival Diageo's 31.4%.
"Already you have a good company to begin with, you could make it a lot better," one source said.
With sales growing again, Pernod Ricard has said it is time to combine short-term profitability and long-term sustainable growth, prompting analysts at Liberum to say:
"We believe the group will set targets to exceed 30% operating profit margins by 2021."