For a while there, Pernod Ricard SA's purchase of Vin & Sprit AB for €5.69 billion ($8.9 billion) in 2008 looked like a perfect recipe for the cocktail dealmakers hope never to sip: a winner's curse. Take a heated auction for a prized asset, Vin & Sprit's Absolut vodka; borrow billions to buy it at the very top of the market; and then stir in a deep recession. But 19 months later, with his company's credit rating improving and its share price back above the $60.25 level it enjoyed at the time of the deal, Pernod chief executive Pierre Pringuet views it all quite calmly. "The price is the price and the time was the time," he says. "Absolut was a must-have for Pernod Ricard. It was an auction, and we had to offer the highest price. It's as simple as that."

And also as complicated. It's clear why Absolut was a must-have. Pernod, the world's second-largest spirits producer, has been chasing global leader Diageo plc for more than a decade. Adding Absolut went a long way toward closing the gap. It gave Pernod a globally recognized product in the important premium vodka category, which it lacked. It also boosted the French company's business in the U.S., the most profitable spirits market and historically a weak spot for Pernod. The company won't say just how big a kick Absolut provided in the U.S., where the vodka is the No. 1 requested brand in bars and the No. 4 selling spirit. But the addition was enough to catapult Pernod from the fourth-largest North American spirits distributor to No. 2, behind Diageo.

Making this deal work, however, would require more than outbidding formidable competitors. Pernod would have to quickly untangle two far-reaching V&S joint ventures, address an antitrust issue created by its position as distributor of Stolichnaya vodka and invest in marketing to help Absolut maintain market share.

In addition, Pernod nearly doubled its debt to €12 billion acquiring V&S, sending its credit rating to junk status. Pernod has spent the months since selling brands to deleverage -- not easy during a recession -- and Pringuet is firm that Pernod will not acquire until its investment-grade rating is restored, which won't happen this year. Meanwhile, Diageo marches on, eyeing targets and, in March, increasing its presence in China, one of the few global markets where Pernod outsells Diageo.

To be sure, this is not an unfamiliar position for Pernod, which has used deals to transform itself from a pair of French pastis makers that merged in 1975 into the No. 2 player in global spirits. Still 14% owned by the Ricard family -- Patrick Ricard was CEO until 2008 and remains chairman -- the company followed the same borrow, buy, deleverage pattern after paying $3.15 billion to acquire 38% of Seagram Spirits & Wine in 2001 and $13.2 billion for Allied Domecq plc in 2005. Each of those deals nearly doubled its size. By that standard, Vin & Sprit (which increased sales about 15%) wasn't such a stretch.

Strategically, though, it was no less important. Pernod's focus has been on building a premium wine and spirits portfolio, focusing investment on 15 strategic brands. Key products, including Jameson Irish Whiskey, Martell cognac, Beefeater gin and now Absolut, account for about half of profits. The rest come from over 60 other wine and spirits brands. Global volume across Pernod brands grew 3% in the second half of 2009, while sales rose 5%, led by growth in Brazil, Africa and the Middle East, and Asia.

Diageo, too, concentrates investment around its key global brands, including Johnnie Walker, Baileys, Captain Morgan, Jose Cuervo and Smirnoff, the world's top-selling vodka. What Diageo has that Pernod doesn't is beer, with its big seller being Guinness. The London company is about double the size of Pernod in the U.S., and about 45% bigger in global net sales. If you strip out the U.S. and Diageo's beer business, however, the rivals are running neck and neck.

"[The competition] is not a Coke-and-Pepsi, daggers-drawn situation," says Trevor Stirling, an analyst with Sanford C. Bernstein & Co. in London. "But they are clearly competing for the same consumers, and they are each other's No. 1 rival. They are both good companies with good brands and different sets of strengths and weaknesses."

Pre-Absolut, Pernod's greatest weakness was its slim presence in the U.S. That was why it went into the March 2008 auction for V&S prepared to win, even though hardly anyone expected it to. "Intense, with strong and very motivated participants" is how Pernod's attorney Paul Bird of Debevoise & Plimpton LLP describes the contest to buy V&S.

As the exclusive U.S. distributor of Absolut, Fortune Brands Inc., maker of Jim Beam, was in the pole position; family-owned Bacardi Ltd., which paid an estimated $2 billion for Grey Goose in 2004, was charging hard; and Swedish private equity firm EQT Partners AB, backed by the billionaire Wallenberg family, was the local favorite.

Pernod was a clear underdog, but its position may have been helped by the groundwork laid by Pringuet, who began courting V&S, owned by the Swedish government, well before the auction. "I visited Sweden even a year before the official process started to meet with the trade unions, farmers, the local community to ... let them know we were serious, professional and extremely loyal," he says.

He also began working with his lawyers to devise an exit from Pernod's contract as the exclusive distributor of Stolichnaya vodka, a lower price-point product than Absolut but close enough to be an issue for antitrust regulators. Pernod's legal team began negotiating a separation agreement with the Russian and Swiss owners of Stolichnaya in early 2008. "We went into the auction with that deal in hand," says Bird. "We were confident that the Federal Trade Commission would agree that it solved the antitrust issue."

An even bigger hurdle remained, however: dissolving V&S' participation in two distribution joint ventures. V&S distributed Absolut in the U.S. through an agreement with Fortune Brands, the No. 4 spirits maker, and globally through its participation in the Maxxium Worldwide joint venture. Having worked with Fortune Brands on a number of past deals, Pernod was able to negotiate an exit from that JV relatively quickly. But the Maxxium JV, which had four partners and wasn't operating as smoothly, presented more of a challenge. Pringuet says that like others in the industry, Pernod was aware of tensions in the JV, which theoretically at least would make it easier to pull Vin & Sprit out. But details of the venture's financial situation were still a surprise.

"That's something we discovered at the last minute because they were restricted in disclosure," says Pringuet. "I personally spent almost a full day in Stockholm reviewing the contract with our lawyers. We came to the conclusion, while taking nothing for granted, that between sensible businessmen we could find a solution." Pernod ended up paying Maxxium €59 million to exit in October 2008, receiving €60.4 million for Vin & Sprit's 25% stake in the venture the following March.

Pernod also paid $230 million to exit the U.S. distribution JV, which would cease distributing V&S brands in October 2008, three months after Pernod took control. That interregnum ended up presenting a headache for Pernod because Fortune Brands discounted Absolut to clear inventory after it lost the auction. Pernod officials have said Absolut sales took a hit when Pernod later restored prices.

An aggressive marketing campaign has been central to winning back those consumers. After buying V&S, Pernod retained Absolut's advertising agency, TBWA Worldwide Inc., and held on to many of its marketing people in the U.S. to maintain continuity.

"If you're going to pay a premium to get the jewel and you're talking about selling a bunch of other brands, the last thing you want to do is destroy anything that made the business attractive to you," says David Harding, a partner at Bain & Co. who has advised many leading consumer products companies. "The elements that define the brand are No. 1, and, frankly, you don't want consumers to know the brand has been sold."

Pernod spent 17% of its €3.79 billion in second-half 2009 sales on advertising and promotion. That's down from the 17.3% devoted to marketing in the same period a year earlier. And a considerable share of that likely went to Absolut. Image means plenty when it comes to selling liquor, and no brand has done more to appear cool than Absolut. Beginning with Andy Warhol's famous painting of an Absolut bottle in 1985, the brand has long associated itself with musicians, artists and creative types. But recently, new entrants including Bacardi's Grey Goose and Diageo's Ciroc have cut into Absolut's market share and perhaps dulled its edge. That's one reason why Pernod took some heat for the €5.69 billion it paid for V&S.

While Pringuet bristles at the notion of Absolut as a tired brand -- "there's no indication that it is seen as old-fashioned" -- he does concede that Pernod has been working to "reactivate the brand essence." The company has signed on a succession of high-profile artists to accomplish that, including hip-hop artists Kanye West and Jay-Z, and director Spike Jonze.

Half of Absolut's sales come from outside the U.S., so growing it globally is as important as polishing the brand's U.S. image. The effort to lift Absolut worldwide may look very different, depending on the country.

Each of Pernod's 15 strategic products has a brand owner in the country where it's made -- in Sweden for Absolut, for instance, and in France for Martell -- with the marketing handled by country or regional operations around the world. That decentralized approach has contributed to double-digit growth of Absolut in France, Canada, Mexico and Brazil.

"That interconnectedness between brand owners and those of us responsible for the in-market work is part of our competitive advantage," says Paul Duffy, CEO of Pernod Ricard USA.

The in-market work includes distribution. For Duffy, that means negotiating agreements with the five or six big U.S. distributors as well as smaller regional players. In the U.S., spirits makers are required to sell their products to wholesale distributors, who in turn sell them to liquor stores and retail outlets. The more top-selling brands a producer can deliver to a distributor, the more say it will have in how those products are marketed and promoted to retailers.

It's a system market leader Diageo was able to tilt decisively in its favor in 2001, when it paid $5 billion for 62% of the Seagram Spirits & Wine Group portfolio, including popular U.S. brands Captain Morgan rum and Crown Royal whiskey. "Look what they were able to do through the Seagram's acquisition," says J. Neely, vice president at Booz & Co. "They were able to reset the industry. They used the scale they had in the U.S. as a basis to go back and redefine their relationship with distributors."

As Bernstein's Stirling explains, Diageo is able to insist on a dedicated sales force within the distributor. "They will send a marketing plan to the distributor, saying in November, for instance, we're promoting Crown Royal; in December, it's Smirnoff."

Pernod isn't quite there yet, but Absolut has greatly increased its "mind share" among distributors. "It has been transformational for us in the U.S.," says Duffy. "It has allowed us to reinvent our route-to-market and to change and consolidate wholesalers, which is what we've been doing over the past 18 months." That includes signing expanded deals in January with top distributors Southern Wine & Spirits of America Inc. and Republic National Distributing Co.

Absolut has clearly delivered on some of its promise already, allowing Pernod to better compete with Diageo. What remains to be seen is whether Pernod can hold the ground it's gained. Pernod has been working to pay down the €12 billion in debt it carried after closing on V&S, setting out to sell €1 billion in assets.

It's about €800 million of the way to its divestiture goal. Recent high-profile sales include Wild Turkey bourbon to Davide Campari-Milano SpA for $575 million and Tia Maria liqueur for €125 million to Illva Saronno Corp. Pernod also in March successfully completed a €1.2 billion six-year bond issue. The proceeds are being used to refinance loans that funded the Absolut acquisition. As of Dec. 31, debt stood at $13.92 billion, and Moody's Investors Service in March raised the outlook on the company's Ba1 credit from neutral to positive.

"We're still leveraged, though it's not seen any longer by the market as an issue," says Pringuet. "But 2010 will not be a year for acquisitions for Pernod Ricard. It's clearly too early for us to go back on the acquisition track until we reach an [investment-grade rating]."

With Diageo actively pursuing deals, Pernod's return to M&A can't come fast enough. Diageo has been eyeing targets in Europe and on March 1 paid about $21 million to increase its stake in baijiu maker Sichuan Chengdu Quanxing Group Co. Ltd. in China. It's the first step in what could be a $906 million buyout that could elevate sales in China of Diageo brands including Johnnie Walker, Baileys and Smirnoff.

You can bet the move didn't go unnoticed by Pernod, the leading importer of spirits in China and India. About one-third of Pernod's sales and profit are generated from emerging markets. Diageo nets only about 5% of sales from those markets. But there is enormous potential for both companies to win converts for their brands. Western-style imported spirits account for less than 10% of the alcohol consumed in China and India. The rest is what Bernstein's Stirling calls "local hooch," rice wine in China, local whiskeys and other spirits in India. And of the imported spirits that are consumed, Chinese drinkers have a keen taste for super- and ultra-premium category liquors.

"In cognac, for instance, in the U.S. what is mostly drunk is [standard] cognac at $30 a bottle," says Stirling. "In China, there is no [standard] sold. It is all about status, so their market is 70% [premium] at $50 a bottle, and 30% is [deluxe] at $100 a bottle."

In addition, while sales in recession-stung U.S. and European markets are expected to remain flat through 2010, emerging-markets sales are healthy and growing fast. Profit in the region Pernod refers to as "Asia and the rest of the world" (the other regions are the Americas, Europe and France) rose 6% in the second half of 2009, while Americas profit plunged 22%. That decline is in line with what other producers have experienced in the Americas.

In the race for dominance in the $370 billion spirits market, remaining sidelined while Diageo maneuvers to gain market share can't be easy for Pernod. And a considerable acquisition somewhere in the world possibly could force a countermove by the French company ahead of the schedule it has set for itself. "If Diageo were to make another move to create some separation between them, Pernod Ricard would have to look at what the M&A landscape offered, just like its competitors," says Debevoise & Plimpton's Bird.

Call it an Absolut balancing act. Discipline in M&A is important. But so, too, are the contents of Pernod's brand portfolio as it jostles for position in the global spirits market. The company did a good job of keeping its balance after Vin & Sprit -- no small feat. But there's always another round.

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