The battle for
the takeover of Gucci by LVMH, and efforts by
Gucci management to defend against the intended
takeover at all costs, is a classic example in
the fashion goods industry. The case can be seen
as mainly a battle between the two majority stakeholders
in Gucci, namely the management of Gucci itself
versus the other majority stakeholder LVMH. It
can also be seen as the battle between two personalities,
De Sole of Gucci and Bernard Arnault of LVMH,
each determined to get their own way, regardless
of the other minority shareholders.
The newly revitalized and profitable Gucci under
the management of Dominico De Sole (President
& CEO) and Tom Ford (Creative Director) had
reformed the company from a failing entity in
the 1970’s and 1980’s to a viable
one by the beginning of the 1990’s. Membership
had passed from the Gucci family to the Bahraini
investment bank, Investcorp in 1993. However,
in October 1985, Investcorp divested 49% of its
ownership in the company at $22 a share and the
rest 6 months later at $48 a share. So ownership
was widely dispersed at the time De Sole and Ford
began to run the company. It was due to their
combined efforts that the company stood revitalized
within 5 years of Ford being appointed Creative
Director in 1994. In analyst’s opinions,
Gucci was a viable enterprise with takeover potential
by early 1999.
What started off possible takeover concerns was
the 9.5% ownership of Gucci stock by the Italian
fashion house Prada. LVMH under its President/CEO
Bernard Arnault had already made a bid for Gucci
in 1994 but considered the asking price of $350
Million too steep at that time. LVMH was famous
for buying low priced but established brand name
businesses and making them part of the LVMH empire.
In De Sole’s mind, Arnault no doubt had
similar intentions for Gucci. Under U.S regulations,
LVMH was forced to report its 5% stake in Gucci
which it did on Jan 6, 1999. This led to a favorable
increase in Gucci share price from $50 to $70
a share. On 12 Jan, LVMH acquired Prada’s
9.5% ownership for $380 Million. By Jan 26, LVMH
had acquired a total ownership of 34.4% in the
company with 20.15 Million shares out of a possible
58.51 Million shares. LVMH had invested $1.44
Billion in Gucci. Keeping in mind LVMH’s
operating principles, its motives were clear.
It would eventually take over the company, worried
the CEO of Gucci De Sole. Looking for a way to
prevent this, De Sole’s first line of defense
was to invite employees into an ESOP. To protect
the share ownership however, De Sole instituted
the ESOP in the form of a Trust.
His establishment of the ESOP with a possible
37 Million new shares under an interest free loan,
but with no dividend rights and no possible transfers
to a 3rd party, only underlines the fact that
he was trying to prevent further takeover attempts.
Even with the ESOP purchase of 20.15 Million shares
(25.6%) and subsequent dilution in ownership,
LVMH’s holdings stood at 26%. LVMH hit back
stating that this was the creation of virtual
shares with no voting rights- therefore a move
to serve management’s interests and not
the interests of Gucci shareholders. Seeking an
injunction from an Amsterdam court, LVMH argued
for voting rights, transferability of the ESOP
shares and redemption of the shares for capital.
The court’s ruling was that Gucci had indeed
not acted in the best interests of the shareholders
and furthermore concealed the intent of its ESOP.
After Gucci had enrolled Morgan Stanley Dean Witter
to its defense, that firm in turn contacted Francois
Pinnault of PPR. After subsequent discussions,
De Sole and Pinnault agreed that PPR would act
as a white knight, buying out 40% in Gucci (and
get seats in its board as well as strategic and
management committee). This announcement on March
19, 1999 led to a 15.7% increase in Gucci share
price, from $70 to $81. LVMH countered by asking
for court injunctions against the takeover. It
also made an offer of $85 per share for a controlling
interest. Finally, Gucci offered LMVH a price
of $88 per share. However this was termed untenable
by LMVH in light of PPR’s controlling interest
in the firm. The courts eventually upheld PPR’s
right to own a majority Gucci stake, while condemning
Gucci’s ESOP move. So technically, LVMH
had lost in the eyes of the Law, and now sought
to divest its ownership in Gucci in view of opportunities
in the European marketplace.
In fact De Sole had acted pretty wisely in handling
over majority ownership to PPR.
The CEO’s of PPR and LVMH were at loggerheads
with each other, though both Frenchman, and had
come from different backgrounds. Upon its investment
in Gucci, PPR had made no secret that it saw LVMH
as a rival. It was dangerous to have a competitor
within the same industry as a major shareholder.
When LVMH as 20% stockholder of Gucci put pressure
on Gucci/PPR to deliver superior results, they
moved quickly by buying Sanofi-Beaute and YSL’s
line of couture and fragrances. The companies
clashed in September 1999 on the Fendi buyout
issue-Karl Lagerfeld preferring Prada/LVMH management.
In November 2000, both companies were back in
court, LVMH alleging that De Sole and Ford were
secretly granted Gucci stock options in 1999 as
part of PPR’s strategic investment. However
the Amsterdam Enterprise Court in March 2001 eventually
granted LMVH the demand for a new investigation
into Gucci’s management practices. PPR shares
fell 3% on the announcement as it was expected
that this would lead to a divestment of PPR’s
40% investment in Gucci. On 10 September 2001,
LVMH and Gucci finally agreed to the former’s
exit.
PPR would pay $812 Mln to raise its stake in Gucci
to 53.2%(8.6 Mln shares @ $94 per share). This
was a $2 premium over closing price. This would
leave LVMH with a 12% interest.
PPR would then buy out the remaining Gucci shareholders,
including 12% LVMH interest in March 2004 at $101.50
per share.
Gucci agreed to distribute a $7 per share special
dividend to all shareholders except PPR.
The minority shareholders who bought into Gucci
at the time of the 1995 divestiture by Investcorp
at $22 per share, would have seen the share price
rise to $48 per share in 6 months when Investcorp
made its final divestment. In 1999, upon LVMH’s
announcement of a 5% stakeholding, share prices
rose from $50 to $70. They further rose when LVMH
announced its buyout of Prada’s 9.5% interest.
Thereafter the takeover battles precipitated a
dilution in ownership mainly to prevent LVMH’s
takeover bid. The ESOP Plan’s only intent
was to prevent this, as while self financed by
Gucci it forbid a transfer of ownership to a third
party. However the employees did not themselves
invest in the ESOP. Such a dilution with no corresponding
investment would serve to reduce the holdings
of shareholders vis-a-vis the total ownership
in the company. The total shares in Gucci rose
from 58.51 Mln before the ESOP to 78.66 Mln with
the free floating shares of 38.36 Mln reducing
in terms of total ownership from 65.6% to 48.8%.
With PPR’s entry into 40% of Gucci with
a payment of $2.9 Billion(39 Mln shares at $75
per share, there was another opportunity for the
minority shareholders to capitalize on the market
price which went up from $70 to $81.Finally the
deal between LVMH and Gucci/PPR agreed upon in
September 1991 envisaged a buyout of upto 8.6
Mln shares for $94 a share.
Gucci would pay a price of $101.50 per share for
the remaining Gucci shareholdings including LVMH’s
12% interest. So in the end, the minority shareholders
would receive some benefit. The payout of a $7
per share dividend and the offer price premium
of $2 per share over the market would add some
value to the minority shareholders.
In the end we can say that the period before LVMH’s
bid for a takeover was beneficial to the minority
shareholders. But consequently their shareholdings
were diluted in value by the ESOP and Gucci’s
efforts to stop the LVMH takeover. PPR’s
entry did cause some favorable influence on market
price, and the final payment of dividend and premium
over the market did in some way make up for the
dilution in ownership. The final deal of $101.50
for the minority shareholders is also a good deal.
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