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Is the largest restructuring of the Scotch whisky industry in decades imminent?

Four days ago, news broke about a likely joint bid to take over Pernod Ricard. Apparently, Pernod Ricard ”have been targeted for a hostile takeover by activist investor Elliott Management owned by billionaire Paul Singer” (well, that’s one version, at least). However, as Singer was looking to slash costs in Pernod Ricard, Diageo and LMVH are instead joining forces to bid on Pernod Ricard instead.

Or so the story goes. There are several versions of this piece of news out there. Another version is that the hedge fund Elliott Management is is in fact something which LMVH and Diageo are thought to be behind. Another article claims that Elliott has already bought into part of Pernod Ricard. Since it seems impossible to read the source directly – a so called note from financial analyst Zuzanna Pusz at the very respectable and big German analyst firm Berenberg – and financial news outlets refer to its contents in slightly different ways, it is a little bit hard to gather the specifics. (Well, it’s not impossible to read the note, you just have to understand exactly what type of news you want to subscribe to from them and I couldn’t really figure it out.) The gist of it, though, as it has been reported, is that LMVH and Diageo may be bidding together on a takeover of Pernod Ricard. (See, for example, here and here.) Or, that it is very likely that they will actually do so.

Glenlivet distillery. When 2019 closes, will it be in other hands?

Most articles on the matter are from financial news outlets, who simply report this. On the whisky scene, things have been very, very quiet. There is Andy Morton at just-drinks.com who is not convinced of this being likely (with some convincing arguments and some, less so). Perhaps most fascinating, the biggest centralised news outlet concerning Scotch whisky, scotchwhisky.com, have not as of yet written anything about the news. This is, to say the least, surprising. Maybe they haven’t because they find the whole thing so highly unlikely that it’s not worth reporting, or they are doing a deeper analysis of the matter. With the kind of platform they have, they may not want to stir up a shitstorm without knowing all the facts. With financial news outlets already having reported on this, I have no qualms in at least discussing the matter a little bit…

I am not a financial analyst, and I do not have the kind of connections in the whisky business in order to do a proper follow up of the story itself. But let’s say that what has been reported is true. Suppose Pernod Ricard are being bought up / perhaps even the subject of a hostile takeover. Suppose that it will be Diageo and LMVH who do it jointly. Since the articles written on the subject are both very short and written by people in finance, it would seem to me that no one has as of yet looked at what this might entail for the world of Scotch.

If the deal were to go through, this would entail an absolutely massive restructuring of the Scotch whisky industry. (And, indeed, of the spirits and alcoholic beverages industry – but I will stick to what bits and pieces I know something of, so we’ll leave things like Guinnesss, Absolut Vodka and other absolutely crucial brands out of the equation and focus strictly on whisky.)

In fact, let’s zoom in even tighter, on the economically less significant but from a whisky enthusiast’s perspective more relevant question of distilleries, rather than brands. (After all, if we’re talking economics, owning Ballantine’s is a lot bigger a deal than owning the major distilleries which produce whisky for Ballantine’s. But again, we are not talking of finance here, just looking at distilleries.)

In order to understand the magnitude of the possible fall of Pernod Ricard from the world of Scotch, these are the (Scottish) distilleries currently under their ownership:

Allt-a-Bhainne
Aberlour
Braeval
Caperdonich (closed)
Dalmunach (the new distillery built on the site of Imperial)
Dumbarton (grain, closed)
Glenburgie
Glen Keith
Glenlivet
Glentauchers
Imperial (closed)
Longmorn
Miltonduff
Scapa
Strathclyde (grain)
Strathisla
Tormore

Oh, and they own that small little whisky brand called Jameson’s and the ginormous Midleton distillery. But again, let’s stick to Scotch…

Brought to you by…Diageo…?!?

Let’s play ”what goes where”, then, shall we? LVMH has a very specific Scotch ownership at the moment. In terms of whisky, it is an investor excklusivley in the single malt category, and in high-end brands. Diageo, on the other hand, is a behemoth invested mainly in blended whiskies, although they of course have several very strong single malt brands, too. To complicate matters, Diageo already owns 34% of LVMH’s drinks division.

If LVMH were absolutely 100% free to pick and choose distilleries from the list above, there’s really only Aberlour and Glenlivet on it – possibly Longmorn and possibly Strathisla. If they are not looking to taking in blended whiskies, the others will not be interesting for them. For Diageo, on the other hand, the bid blending factories may very well be interesting. However, a deal struck where Diageo and LMVH buy things together is a little like Gulliver taking a snack with a Lilliputian. Would Diageo, who are working very hard to make ”The Singleton” the most sold single malt brand in the world (upsetting whisky purists like me in that we think a single malt brand should definitely not come from three different distilleries) really relinquish the world’s number two in single malt, The Glenlivet, to the small LVMH? Hm…

Today, it’s from Chivas Brothers, which is owned by Pernod Ricard. But tomorrow…?

Plus, another thing. Diageo was first formed when Grand Metropolitan overtook Guinness. In that massive deal, objections were raised both from the EU and from the United States about how Diageo would now be too big a player. They were forced to relinquish ownership of John Dewar & Sons, which was sold off to Bacardi. In single malt terms, this meant Aberfeldy, Aultmore, Craigellachie, Macduff (”The Deveron”) and Royal Brackla. Wouldn’t there be massive similar objections with Diageo expanding now, if issues were raised when it was first formed?

Would it be good for Scotch if Pernod became the subject of a takeover by Diageo and LVHM? By. No. Means. Can the answer to that question be yes. Centralised ownership in Scotch whisky history has meant some good things, such as tighter control of production in eras of overproduction. So, not all things would be better if every distillery in Scotland was independently owned, to put it mildly. (With that said, however, which are and have historically been some of the most innovative distilleries on the planet? Glenfiddich, first to build a visitor centre and perhaps the first to seriously be launched as a single malt – independently owned. The first distillery to champion what is today’s hot potato, terroir, Bruichladdich – independently owned when they started down that path. The only distillery to not be sucked into the vortex of extreme pricing of bottles with an age statement above 20 years on the label, Glenfarclas – independently owned. Two distilleries which make some of the best whiskies all of Scotland has to offer, Springbank and Benromach – independently owned. The only distillery which has been around for more than ten years which still offers casks to be purchased by your regular Joe, Arran – independently owned. Just a thought…)

The extremely centralised ownership structure which is already at hand in Scotch, even if this thing with Pernod Ricard would turn out to be just a fantasy or a guess in the dark, is probably better for the industry than for the lover of fine single malts. Anyone who is not a die-hard socialist will tell you that markets need competition in order for quality to be held high and for prices to remain at a sane level. Any situation in which major players achieve anything even remotely reminding of a monopoly consistently leads to (even more) price tampering, and what’s more, a lowering of quality. To put it roughly: strictly from the perspective of the consumer rather than from production, it would probably rather be better for Scotch if Diageo were to became a little smaller, not bigger. If LVMH were to grow their ownership with a handful of distilleries, that would not be a huge deal. With Diageo in ownership of another dozen or so distilleries? Diageo do some things brilliantly, no doubt, but to have them or any company on the planet own half the industry – well, that is not the future I dream for Scotch.

Winter is coming?

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As an endnote: an interesting if not wholly accessible piece with historical perspectives on these matters is to be found here: McKendrick, David G. & Michael T. Hannan, ”Oppositional identities and resource partitioning: Distillery ownership in Scotch whisky, 1826–2009”, Organization Science 25 (2013:4), pp. 1272–1286.

EDIT: I had ”immanent”, not ”imminent” in the headline, as the perceptive Thomas Øhrbom at Whisky Saga pointed out to me. A wonderfully Freudian mistake in English on my part, I must say! Let’s avoid the metaphysical path of discussing ontological issues and Immanuel Kant, shall we? naturally, I meant imminent. With lots of English-speaking people having read this piece, isn’t it funny that the mistake was spotted by someone from Norway?


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