Breakingviews: Pernod Ricard has watered down Elliott’s punch

Pernod Ricard has watered down Elliott’s punch. The Absolut vodka maker has been in the activist’s sights for insipid growth and weak operating margins, but it is now making tangible headway. It may be enough for U.S. activist investor Paul Singer’s outfit to divert its heat elsewhere.

Since last year, the French rival to market leader Diageo has been under pressure to deliver better results from Elliott, which owns a 2.5% stake. Its latest results help. Profit from recurring operations, a key performance metric and a proxy for operating profit, rose 8.7% to 2.6 billion euros ($2.9 billion) in the fiscal year that ended on June 30, the most since 2012.

Operating margin, a key Elliott gripe, rose to 28.1%, up 74 basis points from a year earlier once currency effects were stripped out. That was better than the company’s own target of between 50 basis points and 60 basis points. While that vindicates Elliott’s assertion in February that boss Alexandre Ricard’s target was not ambitious enough, both parties are benefiting from the pressure.

Pernod Ricard’s other big step forward is to replace two non-independent directors with outsiders. Another director, qualified as independent but on the board since 2007, will not stand for reappointment. The changes help dilute Elliott’s claim that the family-dominated board lacks outside perspective.

True, there is still some work to do: the group’s operating margin is still lagging the 31.4% of main rival Diageo and didn’t rise as fast in the past fiscal year. Also, the French company could do more to improve its U.S. business. Elliott may want to prod Pernod Ricard on the logic of paying a premium of 92% for admittedly small liquor maker Castle Brands, which it’s acquiring for $223 million.

Diageo’s larger beer business and its relative strength in the United States, both offering high margins, means Pernod Ricard may never be able to fully bridge the gap. Its shares have outperformed France’s leading CAC 40 Index by 10% and risen nearly as fast as Diageo’s since Elliott disclosed its investment on Dec. 12. That suggests the lion’s share of Singer’s work may be done.

(The premium Pernod Ricard paid for the small liquor maker in paragraph 5 has been corrected to “92%”, not “some 50%”. )

_____________________________________________________________________

Request a free trial of Breakingviews here