Stiff Drink

By Christopher Redman

Patrick Ricard, boss of the french drinks giant that bears his name, enjoys a glass of pastis before lunch. But at a recent breakfast in his private dining room overlooking the Eiffel Tower, he was strictly a coffee man, despite having just pulled off a deal worth celebrating with something stronger. In March, Pernod Ricard stunned its rivals by landing one of the biggest prizes in the drinks sector: Absolut, the world's leading premium vodka, whose acquisition, Ricard concedes, was "a bit of a coup."

Not everyone agreed. As Ricard buttered his toast, the markets battered his firm for paying $8.34 billion for Absolut's parent company, Vin & Sprit--which was almost 21 times the Swedish firm's gross operating profit last year. As if to suggest that Pernod Ricard had overreached, Bruce Carbonari, CEO of Fortune Brands (which was trumped in the Absolut auction), claimed that the price for V&S would not provide an "appropriate return" for shareholders. Yet le patron remained unperturbed. Three years ago, the company leveraged itself heavily to acquire Britain's Allied Domecq, a $13 billion deal that doubled Pernod Ricard's size at a stroke and added such brands as Beefeater gin, Ballantine's whisky and Mumm sparkling wines to the company's drinks cabinet. But the debt was speedily reduced to manageable levels, allowing Pernod Ricard to hit the M&A trail again. The changed economic outlook in the U.S.--the world's largest and most lucrative drinks market and Absolut's biggest--will surely make debt reduction tougher this time around. But what really matters for Pernod Ricard is that it has filled a gaping hole in its portfolio with an iconic vodka brand.

Vodka, like liquid kudzu, just seems to grow and grow, especially in the U.S., where sales have expanded 35% since 2002. Russians still account for nearly half of the 1.22 billion gal. (4.6 billion liters) consumed annually, but the rest of the world is catching up fast, and global growth prospects are huge, especially for so-called premium vodkas. "There was no way that an ambitious company like Pernod Ricard could pass up an opportunity to acquire Absolut, even though it has cost them dear," says senior drinks company analyst Jeremy Cunnington of Euromonitor International.

Pernod Ricard paid top dollar for Absolut because it believes its marketing muscle can increase sales from last year's 10.7 million cases. But the economics of producing vodka surely played a part in its calculations. Whisky and brandy spend years maturing in wooden casks before they can be sold, tying up cash in inventory, but vodka is practically an instant money machine. The chemistry is simple: ferment grain or potatoes or even grapes to make alcohol, then concentrate it by distillation. Filter the resulting colorless, odorless spirit, possibly give it a fruit flavor, push out the publicity boat with a sexy name and designer bottles, and--voil`a!--you have a premium vodka that can sell in the U.S. for upwards of $30 a bottle.

That's why Bacardi paid $2.2 billion in 2004 for Grey Goose, then a record for a single label, and why distillers are releasing new vodkas each week. Leading the field is Smirnoff, owned by Britain's Diageo, which dropped out of the Absolut bidding to buy a 50% stake in the Dutch premium vodka Ketel One for $900 million.

Pernod Ricard's task now is to goose Absolut sales. The vodka has come a long way since production began in 1879 in the southern Swedish town of Ahus. It remained a local brand for a century until 1979, when Russia invaded Afghanistan. Many countries shunned Russian products, including vodka. Absolut saw its chance to go international, and helped by what has become a memorable advertising campaign, it has never looked back.

The acquisition of V&S brings Pernod Ricard closer than ever to its goal of catching Diageo. The combined company will have global sales of 91 million cases, compared with Diageo's 93 million. Absolut alone will propel Pernod Ricard from fourth place to second in the North American market, with a 14% market share, compared with Diageo's 26%. Can the former pastis family business become the global drinks leader? The banks that financed the deal in a difficult market show that for some, at least, the answer to that question is Absolut(ely).