Diageo Gets Relief as Pernod Ricard and Brown-Forman Talks Collapse

LONDON — Diageo’s new chief executive, Dave Lewis, is getting an early reprieve. Talks between Pernod Ricard and Brown-Forman have collapsed, easing the immediate threat of a larger rival at a time when the world’s biggest spirits company is under pressure to reverse years of weak sales and lagging shareholder returns.

The breakdown in merger discussions, announced April 28, removes for now the prospect of a stronger No. 2 competitor combining Pernod’s global reach with Brown-Forman’s Jack Daniel’s brand and U.S. distribution strength. For Diageo, which owns Johnnie Walker, Guinness and Tanqueray, that means less risk of facing a newly enlarged rival with greater scale in key markets including the United States, India and China.

Investors and analysts said the relief may be temporary. They still want Lewis, who took over in January, to show how he plans to address Diageo’s deeper problems when the company reports quarterly results on Wednesday. Those problems include flat or falling sales in recent years, pressure on the share price and criticism that the company has not moved quickly enough to adapt to changing consumer habits.

“The bigger issue is that they have been a poor market leader,” said HSBC analyst Carlos Laboy, arguing that Diageo’s challenge is not simply competition from Pernod, Brown-Forman or Sazerac.

The failed Pernod-Brown-Forman talks had raised concern among investors that Diageo could lose ground to a more formidable rival with a broader whiskey portfolio and more leverage with distributors. Pernod generates about 11 billion euros in annual sales, while a combination with Brown-Forman would have created a company with roughly $17 billion in revenue, narrowing the gap with Diageo’s $20.25 billion.

The collapse of those talks comes as the spirits industry faces a wider slowdown driven by high living costs, changing drinking patterns, tariffs and concerns about the effect of weight-loss drugs on alcohol consumption. Diageo is expected to report a 2.3% decline in third-quarter net sales on Wednesday.

Lewis has not yet laid out his full strategy, but he has signaled that he wants to focus more sharply on cheaper, mass-market spirits and may consider price cuts. He has also pointed to what he described as Diageo’s poor service to wholesale and retail customers. At Unilever, where he built a reputation for turning around businesses through cost cuts and marketing changes, he earned the nickname “Drastic Dave.”

The abandoned merger also highlights how difficult it would be for Diageo to respond with acquisitions of its own. Former executives have said they would have liked to buy Brown-Forman if it ever became available, but Bernstein analyst Trevor Stirling said Diageo’s balance sheet does not give it enough room for a deal of that size. Its net debt stands at about 3.4 times operating profit.

The competitive threat has not disappeared entirely. Sazerac, the privately held spirits company controlled by the Goldring family, emerged in April with an approach valuing Brown-Forman at about $15 billion. With about $6 billion in annual sales already, Sazerac could become much larger if it acquired Brown-Forman, potentially reaching about $10 billion in revenue and controlling as much as 40% of the U.S. whiskey market, according to analysts.

That would strengthen Sazerac’s position with national distributors in the United States, which control access to shelf space and bar placements. It could also improve pricing power. Still, analysts said such a deal would be less disruptive for Diageo than a Pernod-Brown-Forman combination because both companies are heavily exposed to U.S. whiskey rather than across a broader range of spirits categories.

For Lewis, any upheaval in the sector could still create openings if rivals are distracted by integration work or forced by regulators to sell brands. But analysts said his success will depend less on what competitors do than on whether he can revive growth and bring new drinkers into Diageo’s brands.