(FORTUNE Magazine) - In his office overlooking the leafy Place des Etats-Unis in Paris, Patrick Ricard has hung landscapes of the Mediterranean region where he spent much of his boyhood and where his father founded the eponymous family pastis business in 1932. "They are," he says, "my little bit of Provence here in the city."

Other mementos and framed photos are scattered about, but nowhere is there a tribute to the two men who helped transform Pernod Ricard into a global wine and spirits behemoth: French business tycoon Jean-Marie Messier and Hollywood mogul wannabe Edgar Bronfman Jr. In 2001 those two came up with the harebrained scheme of funding their media conglomerate, Vivendi Universal, by selling Seagram, the Bronfman family booze business. British drinks giant Diageo and Pernod Ricard fell upon Seagram with all the gusto of alcoholics at happy hour, and although Diageo grabbed as many of the company's assets as antitrust authorities would allow, Pernod didn't do too badly either, coming away with enough of Seagram to double its own size. At a stroke, Pernod Ricard was transformed from a medium-ranked French company into a major global player with some of the most coveted brands in the business, including Chivas Regal Scotch, Martell cognac, and America's favorite malt whisky, Glenlivet.

Four years later it's deja  vu all over again. In a move last summer that surprised many who had expected the reverse scenario, Pernod Ricard paid $14.1 billion to acquire larger British rival Allied Domecq. The result: Pernod has doubled in size again, to become the world's second-largest drinks company, with anticipated revenue this year of $6.8 billion. It is now the third-largest producer of branded wines, the top spirits company outside the U.S., and the leader in such fast-emerging markets as Brazil, Russia, India, and China, where the greatest potential for growth lies. And since France is the world's largest consumer of Scotch whisky, it's fitting that this French company has become the second-largest purveyor of Scotland's signature spirit, with 21% of the global market.

Not bad for a company that began life in Marseilles as a producer of pastis, the anise-flavored aperitif whose wormwood-infused cousin, absinthe, was the mind-bender of choice for fin-de-siècle Paris. Not bad, either, for Patrick Ricard, the company's 60-year-old chairman and CEO--and FORTUNE's Europe Businessman of the Year for 2005--who wasn't even the favored heir but has managed to transform Pernod Ricard into a global giant his father would hardly recognize.

So what can Ricard do for an encore? "First we have to complete the integration of Allied," he says. Still, the question hangs in the air along with the faint aroma of expensive cigars that pervades Ricard's office: Can Pernod catch Diageo to become No. 1 in the global drinks business? Unlike Messier, Ricard is a man who chooses his words carefully, and he isn't about to be drawn into extravagant predictions about his destiny or that of his company. Yet there's no equivocation in his reply: "If we continue the way we have been going, we will be able to challenge for first place."

THOSE ARE FIGHTING WORDS FOR someone who may have the build of a pugilist but is normally reticent to the point of shyness. Whether Ricard can continue the way he has been going is another question. So far the company has grown primarily through mergers and acquisitions, starting in 1975 when founder Paul Ricard saw the writing on the wall for pastis producers and persuaded rival Pernod to join forces with him to combat the challenge from competing spirits. The next two decades would see the Pernod Ricard drinks cabinet expand to include Scotch (Clan Campbell), bourbon (Wild Turkey), and Irish whiskey (Jameson and Bushmills), as well as Australian wine (Jacob's Creek), Polish vodka (Wyborowa), and a cocktail of other spirits. But after a period of consolidation in the drinks sector, almost all the low-hanging fruit is gone. What's left of any size is nearly takeover-proof--family-owned companies like Bacardi-Martini and Brown-Forman (owner of Jack Daniel's whiskey), or Jim Beam, the drinks subsidiary embedded in the Fortune Brands conglomerate.

THERE'S ALSO THE SMALL MATTER OF THE $12 BILLION OR so Pernod borrowed to fund the Allied takeover. Although Fortune Brands paid about $5 billion for such former Allied assets as Courvoisier cognac and Canadian Club whiskey, which Pernod needed to sell for antitrust reasons (and because it needed the money), and three U.S. private-equity groups recently bought Allied's Dunkin' Donuts business for $2.4 billion, there's still work to be done on the balance sheet. Pernod insists that synergies will squeeze out about $360 million in annualized savings, but it may be some time before the company is in a position to propose, even if a beauty like Bacardi were suddenly to seek a suitor.

Diageo is also not about to stand still while Pernod Ricard plays catch-up. Although the gap between the two has now been narrowed by the Allied acquisition, it remains daunting: Last year Diageo sold 91 million cases of spirits worldwide, compared with 77 million for Pernod Ricard (including the brands it bought from Allied Domecq). More important, Diageo is still the clear leader in the U.S., the largest and most profitable drinks market, especially for premium spirits, whose fatter margins make for greater profits. "Diageo should not be underestimated," says James Dawson, an analyst at Charles Stanley & Co., a London brokerage. "It is extremely good at managing its brands and will have an opportunity to widen the gap in North America as Pernod Ricard rejiggers its portfolio." Diageo is already limbering up to meet the French challenge. "It's good to have a clear enemy," says CEO Paul Walsh.

The coming conflict will most likely be a war of attrition rather than major advances. Pernod is counting on economies of scale to help generate faster organic growth that will win market share at its rivals' expense. The broader drinks portfolio provided by the Allied takeover should also help the company adapt better to different markets. "We needed drinks people wanted to drink rather than those we wanted them to buy," says Richard Burrows, who recently retired as Pernod Ricard's co--managing director. At a time when cocktails are making a strong comeback, he's pleased that Pernod Ricard now controls about 20% of the liqueur market with brands such as Kahlúa, Malibu, and Tia Maria. It has also spent $122 million to secure global distribution rights to leading vodka Stolichnaya.

But most of all Pernod Ricard is betting on a repeat of what it calls the "Seagram effect"--the boost the company got from its superior marketing muscle and distribution networks to goose up the Canadian company's underperforming brands. Sales of Martell cognac, for example, are up 9% since its acquisition from Seagram. Most impressive has been the turnaround at Chivas Regal, rescued from terminal decline as the preferred tipple of aging lounge lizards and now one of the most profitable brands in the super-premium drinks category, with sales up 19% globally and 215% in China, the world's fastest-growing market for premium spirits. According to market researchers Impact Databank, Chivas and Pernod Ricard's other popular Scotch, 100 Pipers, accounted for almost 80% of overall global growth in Scotch sales last year. The aim now is to apply some of that magic to former Allied brands. Ballantine's, for example, is currently the third-ranked Scotch, after Diageo's Johnnie Walker Red Label and J&B, but sales are overly concentrated in Europe. Pernod believes Ballantine's can do better, as can Beefeater, the world's fourth-ranked gin.

Not everybody agrees that the Seagram effect can be repeated. Diageo's Walsh has described the Seagram purchase as the "bargain of the century," while the higher multiple paid for Allied's assets points to much less upside potential. "Developing the newly acquired brands may not be as straightforward as its previous experience with Seagram," explains Parita Chitaksem, senior global spirits analyst at Euromonitor International. "Pernod Ricard turned Seagram's brands around with huge success, but they had been underinvested." Deutsche Bank analyst Graeme Eadie agrees: "Seagram was a neglected business, which is not the case for Allied Domecq." Eadie points out that although the Allied deal boosts Pernod's presence in the U.S. spirits market, it has not produced a quantum leap forward: Pernod's market share is only 8%, compared with Diageo's 22%, a lead that has an impact on the latter's bottom line, given the higher margins in the U.S. "Diageo is not double Pernod Ricard's size, but it's twice as profitable," says Eadie.

NOBODY FAMILIAR WITH THE PERNOD RICARD SUCCESS story, however, would bet against the French company or its chairman, who has a knack for prevailing against the odds. Back when his father was building the family pastis business, Patrick was overshadowed by his more mercurial older brother, Bernard, the heir apparent. In such circumstances younger sons often find themselves looking for careers elsewhere. But the quiet and unassuming Patrick stuck around, learning the business from the ground up and learning also to keep his head down as Bernard and Paul feuded about the direction of the company. So when Paul and Bernard had their last quarrel and parted company, Patrick, the brother who knew the business inside out, became the dauphin. Paul retired in 1968, and after the merger the Pernod family took the helm (with Paul interfering from the sidelines). But in 1978 Patrick finally became chairman, restoring the company's focus on wines and spirits (Pernod Ricard had acquired several fruit and soft drink companies like Orangina as well as a grocery-distribution business) and embarking on the growth strategy that has made Pernod the global drinks power it is today. Over that time the value of the company's stock has climbed steadily, hitting an all-time high in early January of €152.20. And industry observers are bullish about the growth outlook. "Pernod Ricard has a great track record, and the growth in its stock price has been more inspiring than Diageo's," says Chris Brook-Carter of beverage market- research company Just Drinks. Ian Shackleton, an analyst with Lehman Brothers, agrees: "Investors have the sense that Diageo has lagged behind Pernod in taking advantage of emerging-market opportunities." A sense of dynamism generated by the Allied takeover has also been a plus for the French company, while a diminishing thirst for ready-to-drink products like Smirnoff Ice has taken the wind out of Diageo's earnings growth.

But despite the bullish outlook, a bearish shadow looms over Pernod's future, and it's cast by le patron himself. Patrick Ricard has made it clear that he intends to retire in 2008 to spend more time hunting game than pursuing corporate quarry. Like a glass of pastis after water is added, the outlook is further clouded by Burrows's retirement. A former rugby player and CEO of Irish Distillers until it was acquired by Pernod in 1988, Burrows supervised Pernod Ricard's operations in the English-speaking world and played a critical role in the Allied takeover. Although he will remain a member of the board, "there's always a slight nervousness when a key player on a successful side decides to go," says Lehman Brothers' Shackleton.

But it is Patrick Ricard's departure without an obvious family successor (his children by his second marriage are all too young) that has the most potential to knock the company off its stride at a time when its size and diversity threaten an identity crisis. French employees now account for only 12% of Pernod's workforce, and the company portfolio is dominated by non-French assets, particularly Scotch, which represents almost half the volume. In the near future the home market will account for only 10% of sales--almost the direct inverse of what it was when Ricard took over in 1978 and Pernod was still a pastis producer for domestic consumers.

On paper, at least, the family factor shouldn't be important. These days Pernod is a public company listed on the Paris Bourse, and the Ricard family stake of 12% is far short of a controlling majority, even though each family share has double voting rights. But the family stake--plus the presence of a Ricard at the helm--has ensured what the French call a noyau dur (or hard core) and what Burrows terms "the stability provided by a large, committed, long-term shareholder." This, he says, has helped Pernod develop a credible long-term strategy. Important, too, has been the family tradition of decentralization--started by Paul, developed by Patrick, and reinforced last month when Ricard restructured the company to create four regional businesses, the better to manage his far-flung empire. "My father believed that to serve our customers best you had to be close to them," Ricard explains. "That meant being decentralized, so that we got to know them better and could react faster." Although Pernod after the Allied takeover will have more than 18,000 employees, its Paris headquarters will grow by no more than 50 or so, to about 200. The rest will be out looking after their brands and their businesses. "We may be headquartered in France, but in Brazil we're Brazilian and in Argentina we're Argentinean," says Ricard. "What's important is the perception of our products--that our Scotch is from Scotland and our cognac from France. More important still is that locally we have local teams. That's where we're strong. We operate globally, and few know there's a big French company behind our brands."

It is this philosophy that will surely determine whether Pernod Ricard can catch Diageo, which has a far more centralized approach to its global operations. "Pernod Ricard's operational structure gives it an advantage over Diageo," says Euromonitor International's Chitaksem. "Diageo's centralized approach distances it from local decision-making and makes it slower to respond to new opportunities."

Sitting in his office discussing the future, Ricard concedes that integrating Allied Domecq, which also had a centralized approach, will involve a corporate cultural challenge. "We'll have to see whose model prevails--ours or theirs," he says. Given that he's le patron, the outcome doesn't seem in doubt. Nor does his determination to claim the top spot for Pernod Ricard. "The reason we're going to prevail," he says, "is because we'll be more responsive to consumers in every country and on every continent in which we operate." His father, Paul, would surely say "D'accord" to that.

The Spirits World

The five largest companies and their key brands.

Diageo

Captain Morgan, Gordon's, Johnnie Walker, Smirnoff

CASES OF SPIRITS SHIPPED IN 2004* 91 MILLION

Pernod Ricard

Ballantine's, Beefeater, Chivas Regal, Jameson

CASES OF SPIRITS SHIPPED IN 2004* 77 MILLION

Fortune Brands

Courvoisier, Gilbey's, Jim Beam, Maker's Mark

CASES OF SPIRITS SHIPPED IN 2004* 31 MILLION

Bacardi

Bacardi, Bombay Sapphire, Grey Goose, Martini

CASES OF SPIRITS SHIPPED IN 2004* 31 MILLION

Brown-Forman

Finlandia, Jack Daniel's, Southern Comfort

CASES OF SPIRITS SHIPPED IN 2004* 15 MILLION

*Excludes ready-to-drink beverages, wine, wine-based

aperitifs, and brands distributed but not manufactured by the company.

FORTUNE CHART / SOURCE: INTERNATIONAL WINE AND SPIRITS

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