Francois Pinault, chairman of retail group Pinault-Printemps-Redoute (PPR) and Bernard Arnault, chief executive of luxury products company LVMH-Moët Hennessy Louis Vuitton are sparring again.
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“I wouldn’t say they hate each other but they aren’t exactly close,” says a French corporate financier. “As far as I know they haven’t spoken to each other for more than a year even though they have many friends in common.”
Despite different backgrounds – Arnault studied mathematics at the elite Ecole de Polytechnique, Pinault was a school drop-out – they have much in common.
Both worked for their fathers in their 20s, Arnault for Ferret-Savinel, the family-owned construction and real-estate business, Pinault for Bois du Nord, a wood producer. Both have wine interests: Arnault owns Chateau d’Yquem, Pinault owns Chateau Latour. Both have a talent for spotting, and then turning around, loss-making conglomerates.
Arnault’s big break came in 1983 when, using Ferret-Savinel as collateral, he bought Boussac Saint Frères, a state-owned textiles company that owned Christian Dior.
Four years later he sold the firm’s textiles operations and used the money to part finance the establishment of the Christian Lacroix fashion label and then LVMH.
Numerous acquisitions followed. By the mid 1990s LVMH was one of the world’s biggest luxury goods companies, and Arnault (who has a 42% stake in it) was the king of fashion.
Pinault took rather longer to hit the big time. He spent most of the 1970s and 1980s building up Bois du Nord into the biggest wood supplier in France. His masterstroke came in 1990 when he bought Compagnie Française de l’Afrique Occidentale (CFAO) – a trading company based in west Africa.
Like Boussac, it boasted a hidden jewel, Rexel, a highly profitable retail chain that provided the cashflow to pay for Au Printemps, France’s largest retailing chain, and then mail-order retailer La Redoute.
The feud between Arnault and Pinault began in February 1999 when PPR (advised by JP Morgan) bought 42% of Gucci, scuppering LVMH’s attempt to take control of the Italian fashion company.
It was rather a dubious transaction. Gucci, perhaps on the advice of its adviser, Morgan Stanley, had launched a $3 billion rights issue and then sold all the new shares to PPR without offering them to any other shareholders.
LVMH, which had built up a 34% stake in Gucci the previous month and was being advised by Goldman Sachs, now found itself with only 20%. Worse, it faced the prospect of an alliance between the largest retailer in France and one of the world’s best-known fashion brands.
This was not the first time that Arnault had found himself in a takeover battle. The acquisitions of LVMH and Chateau d’Yquem were both bitter affairs. His most audacious success came in 1997 when he stalled the merger of Grand Metropolitan and Guinness and eventually walked away with £350 million.
Pinault was no slouch either. In 1991 he bought self-assembly furniture retailer Conforama from Arnault for $60 million. Three years later, when Pinault-Printemps merged with La Redoute, it was valued at $720 million.
When the identity of Gucci’s white knight became known, Parisian investment bankers braced themselves for a no-holds barred tussle.
In March 1999, Arnault filed a suit against Gucci in Amsterdam claiming that the rights issue was illegal. The court found in his favour but was then overruled on appeal. LMVH took the case to the Dutch supreme court.
Then things began to get nasty. Rumours started to spread that Arnault had broken a promise to the French government not to sack workers after acquiring Boussac Saint Frères in 1983. There were also stories in the French and international press suggesting that Pinault was being investigated by the French tax authorities.
In the spring of 2000, executives at Gucci, LVMH and PPR decided something had to be done – the row was starting to affect the share prices of all three companies. Jean Marie Messier, Vivendi’s chief executive, was drafted in as a mediator.
A deal was eventually struck in which PPR agreed to pay LVMH $100 a share for 8% of the company, thereby gaining control of Gucci, and make a public offer for the remaining shares at a later date.
Hours before the transaction was due to be announced a row erupted. “Arnault insisted that the Gucci board recommend the offer and that Domenico de Sole and Tom Ford [Gucci’s CEO and head designer] sell their shares,” says a banker close to PPR. “Naturally, these demands were turned down.”
Months of mud-slinging and legal wrangling followed. Finally, in March 2001, the Amsterdam Enterprise Chamber decided to launch an investigation into the rights issue.
This was the showdown Gucci shareholders had been waiting for. If the rights issue was upheld, Arnault’s chances of taking control were over. If it was deemed illegal, he was back in the frame. But for reasons that remain unclear, both sides ducked the fight and reopened negotiations.
“I imagine that they both thought they would lose and were worried what it would to do to their share prices at a time when the US economy was going into recession,” speculates a London-based luxury goods analyst.
This time, the negotiations were successful and on September 10 PPR announced that it had agreed to buy 8% of LVMH’s stake in Gucci for e2.1 billion ($1.9 billion) and launch a public $101.50 per share offer for the remaining equity in March 2004. Minority shareholders would be paid a special $7 dividend to compensate them for being excluded from the 1999 rights issue.
It was a pretty good deal for all parties. LVMH made an e760 million capital gain on its investment in Gucci. PPR got control of one of the world’s leading fashion brands, and De Sole and Ford kept their jobs and gained a new boss to help them with acquisition plans.
Minority shareholders such as Putnam Investments of Boston didn’t do particularly well out of it. “They should have got $15 [dividend] not $7 in compensation for the loss of a control premium,” says one analyst.
The fight for Gucci may now be over but relations between the two men are far from cordial following Arnault’s decision to take on Pinault in the art auction market.
Over the past 18 months, Arnault has pumped huge sums into boosting the market share of Phillips De Pury Luxembourg, the world’s third-largest auction house, in which he bought a majority stake last year. As a result, Christies (owned by Pinault) – already in difficulty because of price-fixing allegations – has found it harder to win business.
The two men look likely to cross swords in the fashion industry again too. Gucci and LVMH have both stated that they are interested in acquisitions. But there aren’t many sizeable independent companies following a flood of M&A over the past two years.
Vegna, an Italian men’s clothing company, is a possible target as are Ferragamo, Versace, Dolce&Gabbana and Valentino. “If and when they come up for sale, I would expect Gucci and LVMH to be among the bidders,” says an analyst.
French telephone company Bouyges could also be a flashpoint. Both men have big holdings – Artemis (Pinault’s holding company) owns 14.2% and LVMH 10% – which they are believed to be looking to free up to provide cash for acquisitions in other industries.
