Pernod Ricard is in discussions with Brown-Forman over a potential merger that could create one of the world’s largest premium spirits groups, it has emerged, as the sector grapples with weakening demand and mounting cost pressures.

Via Bloomberg, the French drinks giant confirmed it is currently engaged in talks with the US-based owner of Jack Daniel’s, although both companies stressed discussions remain at an early stage and no deal is guaranteed.

From a strategic perspective, the deal would address gaps in both portfolios. Pernod Ricard (Absolut vodka, Jameson Irish whiskey and Chivas Regal), has relatively limited representation of American whiskey – a category where Brown-Forman is dominant. Meanwhile, while Brown-Forman lacks the same scale in international markets and categories such as Scotch, Irish whiskey and tequila. The tie-up would therefore create a transatlantic spirits powerhouse with a broader footprint both geographically and in terms of category exposure.

The potential merger arrives against a challenging backdrop for global drinks companies. The sector has been hit by a multi-year slowdown in sales as consumers cut back on discretionary spending and shift towards moderation. Both companies have also seen significant share price declines over the past year, reflecting waning demand in key markets such as the US and China.

According to Reuters, traditional spirits groups are also contending with alternative drinks categories, including the rise of cannabis-infused drinks and ongoing shifts towards lower alcohol consumption.

As a result, both companies have recently announced restructuring plans, including job cuts at Brown-Forman.