By Saabira Chaudhuri 

Activist hedge fund Elliott Management Corp. has built a stake in Pernod Ricard, calling on the owner of Chivas Regal whisky and Absolut vodka to improve management and make changes to jump-start growth and lagging profit margins.

Pernod has lost market share across various segments, including vodka, gin and some types of whisky and has "significant room for improvement," the hedge fund said.

The stake, of over 2.5%, is Elliott's latest big bet on Europe where it has made several investments over the past few years on companies like Telecom Italia and Sky PLC. This spring it acquired Britain's biggest bookstore chain, Waterstones.

The hedge fund said Pernod's EUR6 billion acquisition of Absolut in 2008 as has fallen short of expectations. Absolut, like most big vodka brands in the U.S., has struggled with fierce price competition and customer defection to Tito's vodka or other tipples like gin. Pernod in 2015 took a big write-down on Absolut, blaming a challenging U.S. market.

"The result has been a material total shareholder return underperformance relative to its most comparable peers, with the company notably ranking last among its peer set over the last decade," said Elliott in a statement.

Pernod's operating margins are 5 percentage points lower than rival Diageo PLC, said Elliott.

A spokesman for Pernod Ricard didn't immediately offer comment.

Elliott's European forays have been largely led by Gordon Singer, the son of Elliott founder Paul Singer, and a group of managers based in London. Elliott has been active overseas for years, but recently ramped up its public campaigning in Europe. Its approach -- often backing demands for change with threats to oust management and directors -- contrasts with what has typically been quieter campaigns by many peers on the Continent.

The Wall Street Journal recently reported that Elliott has been shifting tact to focus on a company's governance and board structure rather than margins and sales.

Wednesday, the hedge fund said inadequate corporate governance and a lack of outside perspectives have contributed to Pernod's underperformance.

It has met with Pernod's Chief Executive Alex Ricard and has recommended launching a more ambitious growth plan.

The spirits maker's board is heavily skewed toward French directors and isn't as diverse in experience as Elliott thinks it should be according to a person familiar with the matter, who said the hedge fund had found it had an "insular culture." Elliott had built up its position in Pernod over the course of this year, said this person.

The hedge fund in its statement acknowledged that Pernod has made several attempts to improve its performance but said these have failed to generate operating leverage. The French company, which also owns Perrier-Jouet champagne and Glenlivet scotch, has lagged behind some peers in the U.S. despite a restructuring intended to focus on premiumization and improve how it reaches consumers.

Many investors see Pernod, which has heavy exposure to major markets like China and India, as a good consumer-goods investment bet. Jefferies analyst Edward Mundy last week described Pernod's stock as being fairly valued saying there is "a lot to like" pointing to sales growth at the upper end of its 4% to 6% guidance.

But RBC analyst James Edwardes Jones previously has criticized the company's lack of urgency, saying it is too focused on the long-term.

Wednesday, Mr. Edwardes Jones, who has a "market perform" rating on Pernod said the stake could be very positive should it improve operating leverage.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

December 12, 2018 04:11 ET (09:11 GMT)

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