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Boring Liquor’s Exciting Opportunity: PERNOD RICARD SA ADR (PDRDY), Diageo plc (ADR) (DEO), BEAM Inc (BEAM)

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Boring companies can be some of the most exciting investment opportunities. When I say “boring” companies, I mean the types of companies that sell the types of products that have existed mostly unchanged for decades, if not longer. When looking for these types of boring investments, it does not get much more boring than the alcoholic beverage industry. And PERNOD RICARD SA ADR (PINK:PDRDY), the 216-year old French wine and spirits maker, is a particularly boring company.

Pernod’s Boring Liquor Portfolio

As the world’s second-largest wine and spirits maker, Pernod Ricard has an impressively boring portfolio of 36 strategic brands, many of which are likely familiar to readers. These brands include Jameson (world’s No. 1 Irish whiskey), Chives Regal (world’s No. 2 super-premium Scotch), Martell (world’s No. 1 XO cognac) and Absolut Vodka (world’s No. 4 spirit brand of any type). Together these and other brands took in $10.67 billion dollars last fiscal year.

Mergers and Acquisitions

In 2005, PERNOD RICARD SA ADR (PINK:PDRDY) teamed up with the US spirits maker Beam Inc (NYSE:BEAM) to acquire the much larger Allied Domecq, an acquisition that helped to transform both companies. In the deal Beam (formally the conglomerate Fortune Brands) acquired Allied Domecq’s Sauza tequila, Courvoisier cognac, Teacher’s Scotch and Pernod’s Maker’s Mark bourbon, some of the world’s top telling brands. In the process Beam instantly jumped from the world’s No. 7 spirits company to No. 4, more than doubling the conglomerate’s liquor revenues. Thanks to the deal, Beam Inc (NYSE:BEAM) continues to grow today by creating innovative variations on some of those acquired products. One such innovation is a ready-to-drink version of its Teacher’s scotch brand (Teacher’s & Soda and Teacher’s & Cola) sold in a can, with has been very popular in India.

Pernod Ricard was similarly transformed, and catapulted into the world’s No. 2 position overnight. Following this and another big acquisition in 2008, PERNOD RICARD SA ADR (PINK:PDRDY) went into a self-imposed takeover cool down period to focus on their newly acquired brands, rebuild their cash position, and reduce the company’s debt. The recession has been good to Pernod, as boring liquor tends to sell well in good times and bad. Today the company is looking at making small “bolt-on” acquisitions, as well as the possibility of another major acquisition that will once again transform the company in a major way. Last month was one of those small bolt-on acquisitions–the purchase of Le Main au Bois, an acquisition that will further bolster PERNOD RICARD SA ADR (PINK:PDRDY)’s already strong position in the XO (extra old) cognac category.

Pernod is also open to the idea of acquiring another big name: the privately held Tequila Cuervo La Rojeña, owners of the world’s No.1 selling tequila brand, Jose Cuervo. An acquisition of this size would be a major coup for Pernod Richard. Jose Cuervo is currently partnered with Diageo plc (ADR) (NYSE:DEO), which holds the international distribution rights to the brand. That distribution partnership between the two companies will end on June 30 of this year, however. Diageo’s own talks to acquire Jose Cuervo ended in December, leaving the door open for another potential acquirer.

If Pernod is able to acquire Jose Cuervo at the right price, not only will Pernod be acquiring the No. 1 selling tequila in the world, but they will also be taking away the No. 1 selling tequila from their British rival, Diageo plc (ADR) (NYSE:DEO). Jose Cuervo is not just the world’s No. 1 selling tequila, but comfortably so, with nearly twice the global market share of Beam Inc (NYSE:BEAM)’s No. 2 Sauza tequila. Acquiring Jose Cuervo outright would be a significant acquisition for any company (and a significant loss even for the world’s No. 1 spirits maker, Diageo).

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