Pernod Ricard wins €5.63bn battle for Absolut Vodka

It is a drink whose time has come. Vodka is cheap to make, has no pesky maturing process and (as a result) lacks a strong flavour, meaning it can be mixed with any number of flavourings, or simply used as the base for any number of cocktails.

Its lack of a strong defining characteristic – Russia claims the tipple as its own but it has long been made throughout eastern and northern parts of Europe – has also made it perfect fodder for the marketing men who have produced a ple-thora of trendy "designer" brands that have tickled the taste buds of a generation of drinkers who have little inclination to make the effort required to get to know fine whisky or brandy.

And yesterday, the drink proved its rude health when Pernod Ricard stumped up €5.63bn (£4.5bn) to buy Sweden's Absolut Vodka after a hotly contested auction.

In winning control of the Vin & Sprit Group – the owner of Absolut which is being privatised by the Swedish Government – Pernod beat off the favourite Fortune Brands, the American maker of Jim Beam, along with Bacardi and an investment group controlled by the Wallenberg family.

Pernod, whose portfolio of brands includes Jacob's Creek (wine), Chivas Regal (whisky), Mumm (champagne) and Beefeater (gin), said the deal made it "the co-leader in the global wine and spirits industry" with global spirits volumes of 91 million cases. However, that still puts it a shade behind Britain's Diageo, which has the No 1 brand, Smirnoff. Diageo pulled out of the auction several weeks ago, choosing instead to concentrate on the Dutch, family-owned, Ketel One, which it bought 50 per cent of for about £450m, saying it had better growth prospects.

But that didn't ruffle Patrick Ricard, Pernod's chairman and chief exec-utive, who hailed the deal as "a fantastic opportunity".

"Absolut is an exceptional brand. Its integration within our portfolio of premium brands, combined with the strength of our worldwide distribution network, paves the way for outstanding growth prospects," he said.

Nevertheless, analysts described the price as "full" and the market appeared to agree. Pernod's share price shed €2.93 at €65.19.

Perhaps that is because the really exciting growth in the US is probably over. While sales grew 9 per cent by volume in 2007, Absolut has a market share of about 9 per cent after selling 11 million 9-litre cases in 2007.

The other difficulty with vodka is that those factors that have allowed Absolut to establish itself as a premium brand so successfully work for others too, and there are plenty of competitors snapping at Absolut's heels.

They include the aforementioned Ketel One, Bacardi's French-made Grey Goose and Campari's Skyy Vodka. Then there is Russia, where an ambitious group of oligarchs are keen to take back a drink they see as their own. Brands such as Roustam Tariko's Russian Standard – currently being aggressively marketed on this side of the pond – carry the added cachet of Russian authenticity, for whatever that's worth.

Financially, Pernod will need the €125m to €150m of synergies it is promising to reap over the next two to four years from a deal that will be earnings neutral in its first year and will push the company's debt levels to about six times earnings before interest, depreciation and amortisation.

Despite these concerns, analysts remain upbeat. Dresdner Kleinwort's Simon Hales said: "The cost savings are bigger than I anticipated and there is a nice tax benefit from the transaction that the market wasn't expecting to see that will help to justify the price."

Mr Hales says Absolut is "a great premium brand". He believes growth is far from over in the US and there is plenty of room for expansion elsewhere. He added: "Competition has been hot for the last four or five years and Absolut had struggled but in the last year has come back with a renewed vigour." Given what it has paid, Pernod must ensure this continues because there are plenty of rivals waiting to pounce if it does not.