RI Pernod Ricard

By Saabira Chaudhuri 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (December 13, 2018).

Activist hedge fund Elliott Management Corp. has built a EUR1 billion ($1.13 billion) stake in Pernod Ricard, calling on the owner of Chivas Regal whisky and Absolut vodka to shake up management and boost profit margins.

The stake, of over 2.5%, is Elliott's latest big bet on Europe, where its investments in recent years include Telecom Italia SpA and Sky PLC. Earlier this year, it acquired Britain's biggest bookstore chain, Waterstones.

The hedge fund said Pernod has lost market share across various segments, including vodka, gin and some types of whisky, and has "significant room for improvement." While its sales have grown steadily for years, margin growth has stagnated, leaving Pernod's operating margins 5 percentage points below those of rival Diageo PLC, the fund said.

Elliott will press Pernod to set more ambitious targets for cutting costs by centralizing more functions and raising revenue to improve margins, while adding new talent from the outside, according to a person familiar with the matter.

"Our strategy is working and is the right one combining short-term profitability and sustainable, profitable and responsible growth under a consistent and long-term road map," Pernod Ricard Chief Executive Alex Ricard said. Sales and profit growth from ongoing operations have accelerated this year while the company's cost-savings plan is ahead of schedule, he said.

Shares of the Paris-listed company gained 5.9% Wednesday.

Elliott is among the world's biggest hedge funds and one of the most prominent activist investors globally, having launched campaigns against a raft of companies including Australian mining giant BHP Group Ltd., South Korea's Samsung Electronics Co. and U.S. aerospace-parts maker Arconic Inc.

The New York-based fund's European foray, though, has seen mixed success.

Elliott is waging a bitter battle against French media conglomerate Vivendi SA over control of Telecom Italia since winning a proxy battle to install new directors in May. The hedge fund, like many of its rivals, also took a hit on NXP Semiconductors NV of the Netherlands, betting incorrectly that its deal to be acquired by Qualcomm Inc. would be approved by regulators.

Elliott's European bets have been largely led by Gordon Singer, the son of Elliott founder Paul Singer, and a group of managers based in London. The fund has been active overseas for years, but recently ramped up its public campaigning in Europe. Its approach -- often backing demands for change with threats to oust management and directors -- contrasts with the quieter campaigns more typical of activist investors on the Continent.

The Wall Street Journal recently reported that Elliott has been changing tack to focus on a target company's governance and board structure rather than just on margins and sales. In the case of Pernod, the fund views its management and board as being too French and insular, while lacking diverse career experience.

The drinks company traces its roots back to 1805 when Henri-Louis Pernod founded an absinthe distillery in a French-Swiss border village. In 1932 Paul Ricard founded his own anise-based spirits operation in Marseille. The two French companies merged in 1975.

Pernod had been considered safe from outside pressure as the family behind it holds about 15% of shares and 25% of voting rights.

Elliott isn't looking to oust Alex Ricard -- the grandson of Paul -- as CEO nor to pressure Pernod to sell itself, said a person familiar with its thinking. Given the family's influence and the importance of its name to the Pernod brand, the hedge fund needs its cooperation. Antitrust issues and likely pushback from the French government over a sale of Pernod -- one of the country's best-known companies -- would make a sale difficult.

Mr. Ricard, when meeting with Elliott in November, was receptive to its concerns and agreed Pernod needs to be bolder, said this person.

However on Wednesday, Mr. Ricard indicated he doesn't agree with Elliott's assessment. He noted that Pernod's share price has risen nearly 38% over the past three years, outperforming French and European indexes, and that the company in that period has added three directors to its board, giving it a range of experience.

The hedge fund said Pernod's EUR6 billion ($6.8 billion) acquisition of Absolut in 2008 has fallen short of expectations. Absolut, like most big vodka brands in the U.S., has struggled with fierce price competition and customer defection to Tito's vodka or other tipples like gin. Pernod in 2015 took a big write-down on Absolut, blaming a challenging U.S. market.

The Paris-based company has over 140 brands, some of which aren't growing. Elliott hasn't singled out brands Pernod should sell but wants the company to do an analysis of its portfolio.

Ben Dummett contributed to this article.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

December 13, 2018 02:47 ET (07:47 GMT)

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