Fashions come and go but quality lasts forever. That, anyway, is the premise underlying a decision to buy a Louis Vuitton handbag or a pair of Gucci loafers rather than their supermarket equivalents. But what of the companies producing these goods ? Do they go on forever? Or must they now – even in continental Europe – be constantly on guard against threats to their independence? Is this what people meant when they talked of the corporate restructuring that the launch of the euro would precipitate?
Handbags at dawn
Such questions are made apposite by the acrimonious battle which has dominated the lives of late of senior management at French luxury goods company LVMH, and Gucci, the Italian company which has its primary listing in Amsterdam and a secondary one in New York.
The deal is high-profile partly because luxury goods – with covetable brandnames like Gucci, Moet and Givenchy – add a certain cachet to any story. Headlines like Handbags at Dawn are irresistible even to usually restrained financial journalists.
But this story is also unusual because it began as ‘a creeping takeover’ – in Gucci’s words – rather than an outright bid. Back in January, LVMH announced it had built a stake in Gucci of 34.4 percent but, contrary to Gucci’s request, did not want to make a bid. Ironically, if Gucci were listed almost anywhere else in the western world, LVMH would have been obliged to make a bid. But Amsterdam has no such requirement.
Instead, LVMH chairman Bernard Arnault proposed a standstill agreement, involving a strategic alliance between Gucci and LVMH to exploit potential economies of scale and synergies between them. Domenico De Sole, Gucci’s president, countered with his view that because luxury goods brands are so distinctive, economies of scale and synergies are illusory.
Generally, Gucci’s defense has involved beefing up an already effective and consistent IR program to meet the challenge of keeping shareholders and analysts informed and on-side. But Gucci also took two decisive steps that undoubtedly upped the ante in what has become a protracted battle.
Bob Singer, CFO at Gucci, is at the forefront of the IR campaign, but he stresses that the strategy for achieving its goal is the same as the strategy he and his colleagues have been pursuing since Gucci’s IPO. ‘We understand that institutional shareholders have only one fundamental motivation and that is to maximize the value of their investment,’ says Singer. ‘Ever since we went public in 1995, we have understood that. That’s the only reason we’re here. And over the years we’ve built up a good level of credibility with analysts and institutions. So throughout this period we’ve continued to be very straightforward, explaining what we’ve done and why we’ve done it.’
Takeover-free zone
The Gucci line is that it was unacceptable for LVMH to build up its stake in Gucci by stealth, and then try to take a degree of control over the company, without the shareholders getting any takeover premium. Worse, it would make it unlikely anyone else could buy the company.
This was Gucci’s justification for making two dilutive share issues as the major planks of its defense. The first was of 20 mn shares – the size of LVMH’s holding – to a newly created employee share ownership plan (Esop). The aim was to neutralize the LVMH stake. ‘By having such a large stake and asking for board representation, LVMH would have taken out forever any takeover premium,’ argues Singer. ‘It was clear this would result in a diminution of the value of the company for shareholders.’
Gucci then had to convince shareholders it was in their interests. ‘We undertook a massive campaign to explain ourselves. The day we launched the Esop, Domenico De Sole spent the whole day talking to the press and I spent the whole day talking to shareholders. We [De Sole and Singer] also held a conference call. We wanted to explain that what we’d done was designed to enable a takeover bid to be successful.’ Whoever it might come from.
The second issue came some weeks later when Gucci struck a deal with Pinault-Printemps Redoute, to whom it issued a 40 percent stake for $75 a share or a total of $2.9 bn. PPR was also to be represented on the supervisory board and Gucci’s executive committee.
LVMH was furious – and ostensibly stymied. Arnault fulminated that it constituted an about-face on Gucci’s part since it was transferring ‘de facto control to PPR without any of Gucci’s existing shareholders receiving a premium.’ Singer counters that when PPR said it wanted a partnership rather than a full bid, Gucci insisted that the transaction preserve the ability of a third party to make a full bid. Indeed, Arnault subsequently made a bid, so clearly the agreement did not render this impossible.
From skepticism to unanimity
But it wasn’t really Arnault that Gucci wanted to please; its concern was with the rest of the company’s shareholders. Among them, Singer concedes, there was initially a level of skepticism. ‘But one of the things that’s remarkable about this entire period is that we’ve been able to convince shareholders – unanimously in the case of the Esop and almost unanimously in the case of PPR – that what we did was in their best interests. That gives a good indication that we’ve been credible.’
However, it’s not only the investment community Gucci has to convince. Back in February LVMH, advised by Goldman Sachs, sought an injunction to freeze the Esop shares and rescind the issue. The Enterprise Chamber of the Dutch court is now set to adjudicate on both this and the PPR issue, which LVMH also contests. Alas the Dutch court does not time its pronouncements to coincide with magazine deadlines, so the outcome of its deliberations will be announced, inconveniently enough, between the time of writing and the date of publication of this issue.
The court has, however, already had a few things to say. In its initial pronouncements in March it froze the voting rights of the LVMH and the Esop shares, pending a final ruling; and ordered Gucci to open bid talks with LVMH. It also suspended the PPR deal. In short, it has told all parties to do nothing that might alter the status quo until its final ruling.
For its part, LVMH complained in a letter appealing directly to fellow Gucci shareholders, after the PPR deal was struck, that an offer was now effectively impossible. ‘LVMH cannot launch an unconditional public offer because it would have no realistic chance of success… there is no precedent for a successful offer that was opposed by a holder of 40 percent or more of a company’s shares,’ the letter read.
But by April 19 LVMH was formally launching a tender offer for Gucci. If PPR’s capital increase were annulled, it would offer $91 a share; otherwise, the offer would be $85 a share and conditional upon Gucci issuing enough shares to LVMH to bring its holding to 50.1 percent.
Time out
For now, as we await the Dutch court’s decision, activity has reduced to a low level as everyone takes a little time out. The court has said it will pronounce on May 27th but no-one really expects that to be the end of the matter. The court said in its written ruling after the preliminary hearing on March 22, ‘a situation should be created whereby, now that a public offer has been announced, the parties are placed in a position that enables a fair evaluation of the LVMH offer and of any other offers.’
For Bob Singer and his colleagues, a fair valuation would be $88 per share. And the company’s board has made a public declaration that it would recommend an offer at that price to its shareholders.
So will LVMH yet get its prize? ‘The only question is whether they will put up enough money,’ answers Singer wryly. ‘They’ve created a lot of stories saying it’s not possible for them to take over Gucci. I can tell you – based on my conversations with our shareholders which on this subject have been very intense in recent weeks – if they do put the right price on the table, they will be able to buy the company.’
Whatever happens, Gucci versus LVMH is a new kind of contested takeover on the continent. Other examples include the three-way battle for Telecom Italia, which looks like going Deutsche Telekom’s way; and Banque Nationale de Paris’s two-prong hostile bid to acquire Paribas and Société Générale. Between them these deals are worth over $100 bn. Gucci and LVMH is small by comparison, but the fact that it is currently mired in the courts makes it a harbinger of things to come: namely, a move toward a more US approach to thwarting unwelcome bids. In the States, it’s almost the norm for a contested transaction to be arrested by a spell in the courts at some stage. But to date it’s been a rarity in Europe.
Of course, we shouldn’t be surprised by the recent upsurge in M&A activity in Europe. After all, since the launch of the euro was first fixed for the beginning of the year, the business and financial media – including this magazine – have been universally predicting major corporate restructuring across the continent.
And what are mergers, takeovers, alliances and partnerships if not the stuff of corporate restructuring?
