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By Mike Caggeso
France’s Pernod Ricard SA won a highly contested auction to buy V&S Group – makers of Absolut vodka and Cruzan rum – from the Swedish government for $8.9 billion, a stiff premium that doesn’t sit well with traders.
Pernod Ricard’s shares dipped almost 4.5% today (Monday) on news of the deal, as analysts expected the price tag for V&S, also known as Vin & Sprit, to fall between $6 billion and $7 billion. The deal makes the company the world’s second-largest alcoholic beverage maker but also adds a dollop of debt on top of the company’s existing debt.
Specifically, debt levels are about six times earnings before interest, tax, depreciation and amortization, the company said.
Chairman of the Board Patrick Ricard acknowledged the debt, but justified the acquisition as necessary.
“The brand is for sale when it’s for sale. You buy it when it’s for sale or you miss it,” Ricard told Reuters. “We have a big debt. So the first goal will be to deliver the synergies, to make the cash flow and to reimburse the debt, to go back to where we are today.”
Sweden’s Prime Minister Fredrik Reinfeldt decided to auction Vin & Sprit to reduce the government’s role in the economy and pay down debt with the proceeds.
Pernod won the bid over Jim Beam-maker Fortune Brands Inc. (FO), V&S Group’s partner in a U.S. joint venture, as well as Bermuda-based Bacardi International Ltd., and the billionaire Wallenberg family.
Absolut is the world’s No. 1 premium vodka brand. Its 11 million nine-liter cases sold in 2007 marks a 9% increase for the year. Almost half of those cases are sold and cleverly marketed in the United States, a market where Pernod Ricard previously hasn’t had much exposure.
Pernod Ricard said the deal would give the company a total annual sales volume of 91 million nine-liter cases, close on the heels of Diageo PLC’s (DEO) 93 million cases.
Diageo’s brands include Smirnoff vodka, Johnnie Walker Scotch whiskies, Captain Morgan rum, Baileys Original Irish Cream liqueur, Tanqueray gin and Guinness stout.
Money Morning Investment Director Keith Fitz-Gerald said that London-based Diageo is a good investment play on China, where the company recently posted double-digit sales growth.
“Thanks to the emergence of new economic middle and upper classes in China, the demand for luxury goods is escalating on a global basis,” Fitz-Gerald said.
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