French spirits group Pernod Ricard is inheriting an estimated €300 million worth of stocks of Cognac and Scotch whisky as part of its Seagram acquisition, an industry source said on Friday.
The source told Reuters that Pernod had acquired between €50 and €100 million worth of stocks of Cognac, mainly Seagram's Martell label, and another €150 to €200 million of stocks of Scotch whisky, principally from the Chivas brand.
The brands were acquired as part of Pernod's joint purchase, alongside Britain's Diageo, of Canadian spirits firm Seagram in December.
The proceeds from the barrels stashed in the Martell and Chivas cellars could be used to help pay off Pernod's debt, which rocketed to more than €3 billion to help pay for the Seagram brands.
Reuters reports that this kind of stock overflow is generally negative for a drinks producer since it depresses its return on capital invested, but in this case, will be an advantage for the spirits' new owner.
Though the stocks will not go on to the market for some years, they will bring in free cash that Pernod, owner of Havana Club rum, Wyborowa vodka and Jameson's whiskey, can use to reduce its debt estimated at €3.2 to €3.7 billion.
BNP Paribas analyst Nikolaas Faes said Pernod was acquiring up to nine years' worth of Martell Cognac stocks, whose value he estimated at about €300 million, plus another €170 million worth of stocks at Chivas, taking the total to nearly half a billion.
"The excess stocks at Martell and at Chivas Regal could produce a positive surprise for Pernod Ricard by generating more free cash in order to pay off its €3.4 billion of net debt (after an estimated 420 million proceeds for SIAS and BWG)," Faes said.
Pernod, which issued a €425 million six-year convertible bond in February to help reduce its debt, is in the process of divesting non-strategic interests including its BWG distribution affiliate and its SIAS fruit preparation business.
In addition, Pernod and industry leader Diageo expect to rake in $700 million between them from the sale of non-core Seagram brands.
Pernod is scheduled to publish its 2001 results this week. The company has already said it expects 15 per cent growth in operating profit in its core wines and spirits business, and net profit growth of about 30 per cent before exceptional items.