Hey Elliott, Guinness Is Good for You

(Bloomberg Opinion) -- Elliott Management Corp., fresh from its victory in pushing for a break-up of Costa Coffee owner Whitbread Plc, has taken a more than 2.5 percent interest in Pernod Ricard SA.

But this shift from coffee to champagne looks like a strange choice. If Elliott wants to shake up a drinks group, Diageo Plc is a better candidate. For all its improvement in recent years, there is still a big opportunity to create value from the sale of Guinness.

The activist’s argument for Pernod is that its revenue growth isn't being matched by a sufficient uplift in profit. It needs to be run more efficiently, and its 6 billion-euro ($6.8 billion) acquisition of Absolut in 2008 hasn't lived up to expectations. Consequently, the operating margin is 5 percentage points short of Diageo's.

Furthermore, the big family shareholding – the founding Ricard family owns about 16 percent – means the company lacks outside perspective and needs stronger corporate governance.

But closing the margin gap between the two rivals would likely include cost cuts. It may be difficult to achieve this at Pernod without undermining the company’s strengths. 

The company spent about 19 percent of its revenue on marketing last year, whereas the figure was 15 percent at Diageo, so trimming this would be an easy way to boost profitability. However, that could endanger future organic growth. Pernod has been good at launching innovative new products, such as in its Jameson Irish whiskey business, and it would be a mistake to jeopardize this. Diageo, on the other hand, has struggled to lock down a solid pace of expansion, and seems to be ripe for the kind of improvement an activist could provoke.

Hey Elliott, Guinness Is Good for You

There is one reason why Diageo, on the surface, doesn’t sound so appealing for an activist. Since his appointment in January 2017, Chairman Javier Ferran is doing many of the things an agitator such as Elliott likely would, including stepping up cost cuts, buying back shares and selling off peripheral assets. That could mean there is limited scope to push for change.

But there is nevertheless a big reason why it’s a better target: there is scope to create significant value from selling off Guinness. The division was worth 8 billion pounds ($10 billion) in 2015, according to analysts at Bernstein. That sounds more tempting than any strategic justification for keeping the business.

There is not an obvious way to create similar value from large scale disposals or demergers at Pernod. Unloading the wine business, or some other peripheral assets, wouldn’t come close. Add to this the challenge in shifting a large family stake, and it seems Elliott should have chosen Diageo for its tipple.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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