BREAKINGVIEWS-Pernod and Jack Daniel’s would be a stiff cocktail

By Jeffrey Goldfarb

NEW YORK, March 27 (Reuters Breakingviews) - Mixing anise liqueur and Tennessee whiskey would be a complex cocktail. There's some appealing logic to the idea of Paris-based Pernod Ricard PERP.PA swallowing Jack Daniel's distiller Brown-Forman BFb.N. Blending all the financial ingredients in measured proportions, however, looks like a painstaking challenge.

The booze business has been dispirited of late. Liquor sales dipped 2%, to $36 billion, in the United States last year, according to an industry trade group, and a record-low 54% of Americans say they drink alcohol, a recent Gallup poll found. Pernod and Brown-Forman are feeling the effects. Each has lost 60% of its market value over the past five years, stiffening the idea of a transatlantic combination, which the two companies confirmed on Thursday they were discussing.

Although the concoction invites comparisons with two drunks propping each other up, mixing Pernod with Brown-Forman would also generate some theoretical cheer. An outright acquisition might be difficult for the French producer of Absolut vodka and Beefeater gin even though the headline numbers stack up nicely.

Offering a hefty 50% premium to the undisturbed price of its U.S. peer would cost Pernod nearly $18 billion, including net debt. Assume cost savings equal to 10% of Brown-Forman's top line, and add the resulting $500 million to the Kentucky-based group's $1.2 billion in projected 2026 operating profit, using estimates gathered by Visible Alpha. Deduct tax, divide the sum by the deal's enterprise value and the implied return on investment is 7.5%, higher than the figure Morningstar analysts put on Brown-Forman's cost of capital.

Heavily diluting the idea of an all-cash takeover, however, is that the resulting mashup would have net debt equal to more than 6 times EBITDA. This helps explain why the companies describe their potential union as something "akin to a merger of equals."

The strategic logic goes down smoothly. Only about a fifth of Pernod's sales are in the United States, suggesting that Brown-Forman could probably help it with expansion. Conversely, Jack Daniel's stands to benefit from Pernod's broader international presence.

Other ingredients will make the concoction sticky. The Brown family controls more than two-thirds of their company's vote and has been reluctant to sell. Brown-Forman spurned a takeover approach from Constellation Brands in 2017, and the latest annual report reinforced its belief that staying independent is what's best for stockholders. A dual-class share structure also complicates any equity combination with Pernod, where the Ricard family retains substantial influence and Alexandre Ricard is chairman and CEO. It will take some neat balancing of egos and zesty financial twists for these negotiations to end with a toast.

Follow Jeffrey Goldfarb on X and LinkedIn.

CONTEXT NEWS

Pernod Ricard and Jack Daniel's distiller Brown-Forman said on March 26 that they are in talks about a deal "akin to a merger of equals," confirming an earlier Bloomberg report citing unnamed sources about a potential acquisition.

Brown-Forman said there would be "significant synergies" for a combined company "anchored by two iconic families," under the structure being considered.