This European company isn’t sugarcoating its coronavirus problem

Pernod Ricard, the maker of Jameson whiskey and Absolut vodka, cut its annual profit growth outlook for 2019-2020 on Thursday, as it said China’s coronavirus epidemic was likely to have a “severe” impact on its third-quarter performance.

The French spirits maker, which generates 10% of its global sales in China, said it couldn’t predict the “duration and extent of the impact,” but stressed it remained confident on overall strategy.

“In our view Pernod Ricard deserves credit for attempting to quantify the impact, which few other companies we follow have done,” said James Edwardes Jones, analyst at RBC Capital Markets.

He added: “We don’t believe that this should weigh heavily on the shares, albeit China is an important market for Pernod Ricard (we estimate 14% of sales and 20% of EBIT [earnings before interest and taxes]) if the lack of reaction for others in the sector is any guide.”

Shares in Pernod

RI, +3.80%

 closed up 3.8% on Thursday.

Pernod’s warning came as the European Union cautioned on Thursday that the coronavirus outbreak had emerged as a “new downside risk” for the eurozone’s growth prospects.

In its winter 2019 economic forecast, the European Commission said: “The longer it lasts, however, the higher the likelihood of knock-on effects on economic sentiment and global financing conditions.”

Paolo Gentiloni, European Commissioner for the Economy, added: “We still face significant policy uncertainty, which casts a shadow over manufacturing. As for the coronavirus, it is too soon to evaluate the extent of its negative economic impact.”

Pernod, the world’s second-biggest spirits group after the U.K.’s Diageo

DGE, -0.87%,

said operating profit from recurring operations would grow between 2% to 4% this year, down from the 5% to 7% it previously predicted, because of the impact of the coronavirus outbreak.

The French spirits maker reported a net profit of €1.03 billion ($1.12 billion), up 1% from a year earlier, while profit from recurring operations was €1.78 billion, up 4.3% on an organic basis. Sales reached €5.47 billion in the six months to Dec. 31, a 5.6% gain on the year earlier, and 2.7% higher on an organic basis.

The company came under pressure to boost its margins and improve its corporate governance in December 2018, after U.S. activist investor Elliot Management built a 2.5% stake in the company.

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Muddy Waters’s FTSE 100 Target Has a Credibility Problem By Bloomberg

© Reuters. Muddy Waters’s FTSE 100 Target Has a Credibility Problem

(Bloomberg Opinion) — When short-sellers such as Muddy Waters Capital LLC accuse listed companies of balance sheet manipulation, the target typically responds with their own lengthy rebuttal. Other investors caught in the middle often don’t know what to think and so a lot depends on the board’s credibility and transparency.

NMC Health Plc, the subject of Muddy Waters’s latest attack, is now a little short of both.

On Monday, the United Arab Emirates’ hospital operator and member of the , admitted that it doesn’t know how much of the company its major shareholders actually own. (This is separate to the Muddy Waters allegations, which focused on  the asset values, debt and cash balances that NMC reports, as well as governance issues).

Founder and chairman Bavaguthu Raghuram Shetty is conducting a legal review to verify the size of his stake and that of two other Emirati controlling shareholders. These may have been “incorrectly reported historically to the company and the market,” NMC said in a statement.

The details are complicated, but the upshot is that Shetty and vice chairman Khaleefa Butti Omair Yousif Ahmed Al Muhairi must absent themselves from board discussions until their holdings and any “security arrangements” are clarified, and until the board decides whether they should remain directors.  

The concern is that some of the shares may have been pledged as collateral and could be sold by financial institutions without prior approval from the shareholder, whoever that turns out to be.

Such worries may have merit. The stock has plunged 70% since Muddy Waters published its report in December. Share sales by major holders who’ve needed to settle margin calls on loans might have contributed to the rout.

Needless to say this is pretty embarrassing for NMC who accused Muddy Waters in December of issuing “false and misleading” research. Now, in one respect, the company has had to admit that its own disclosures to the market were false and misleading, albeit for reasons beyond its direct control.

The best hope now for long-suffering minority shareholders is that someone comes along and makes an offer for the healthcare operator. In a separate and rather fortuitously timed statement, NMC confirmed on Monday that it had received “highly preliminary” approaches from Kohlberg Kravis Roberts & Co LP and GK Investment Holding Group SA.

NMC was worth about 8.5 billion pounds ($11 billion) at the share price peak in 2018 so it’s not surprising the company has drawn takeover interest now that it’s capitalized at just 1.6 billion pounds. NMC’s valuation — less than 7 times estimated earnings — is pretty undemanding for a healthcare stock; even one that’s subject to those Muddy Waters claims of balance sheet manipulation, which it denies. The shares rose 7% on Monday, a surprisingly decent outcome given the embarrassing share ownership revelations.

However, potential bidders will still have concerns about how to conduct due diligence on a company that’s accused of being less than candid. The findings of an independent review of those Muddy Waters allegations by former Federal Bureau of Investigations director Louis Freeh aren’t yet known.

The boilerplate caveat accompanying NMC’s regulatory announcement that “there can no certainty that any offer will be made for the company”, or at what price, seems more pertinent than usual.

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