The Gucci Group (‟Gucci”) Pinault Printemps Redoute (‟PPR”) alliance is based on a well-known hostile takeover bid, which was played out by applying the regulations on Public Takeover Bids (‟PTB”) to the advantage of PPR, riveting the pawn to its rival Louis Vuitton Moët Hennessy (‟LVMH”).
Since the beginning of 2003, the business press has frequently cited the distribution group Pinault Printemps Redoute (‟PPR”). First of all, because it multiplies the sale of its assets deemed non-strategic (sale to Crédit Agricole of 61 percent of the capital of Finaref; acquisition by Office Depot of Guilbert, European leader in the distribution of office supplies to companies; sale to the Wolseley group of Pinault Bois & Matériaux, etc.); but also because PPR bought back numerous shares in the Dutch company Gucci Group (‟Gucci”) at the same time, increasing its stake in the luxury group to 63.28 percent on 8 May 2003. This article details the Gucci PPR alliance.
In addition, François Pinault, the founder of the PPR group and the man who organized the refocusing of the group towards luxury and mass distribution, has just ceded the presidency of Artémis, the holding company owning 42 percent of PPR, to his son François-Henri Pinault.
Finally, the stylist of Gucci, Tom Ford, exercised, at the beginning of May 2003, 1 million of his stock options out of the 4 that he can use from December 1999 to June 2004. This disengagement of Tom Ford in the shareholding of Gucci has been interpreted as a sign of his imminent departure from the luxury group, accentuated by the fact that his employment contract will expire in June 2004. These rumors were denied by the creator who announced his intention to stay as long as ‟his freedom of creation would not be threatened”.
It is worth recalling the context that enabled PPR to become the majority shareholder of Gucci, as well as the objectives towards which these two groups are currently working.
The Gucci PPR alliance: the discovery of the white knight, PPR
According to Article 1 of COB Regulation No. 2002-04, a Public Takeover Bid (‟PTB”) corresponds to “any offer made publicly to holders of financial instruments traded on a regulated market with a view to acquiring all or part of the said financial instruments”. When a hostile PTB (i.e. not desired by the target issuer) is or is going to be launched on a company, there is a defense tactic which consists, for the company victim of the attack, in finding a white knight in order to preserve its independence. The strategy is to sell a large block of shares to a friendly investor whom the target company does not see as a competitor or a danger.
This is the solution Gucci opted for in March 1999, following the acquisition by Louis Vuitton Moët Hennessy (‟LVMH”) of 34.4 percent of its capital (20,154,985 shares). Four years earlier, Gucci had floated on the stock exchanges in New York and Amsterdam at a price of USD22 and, five years earlier, Domenico De Sole had been named CEO of the Italian luxury group, while Tom Ford took on the role of artistic director. These two men saw the repurchase of Gucci shares in January 1999 by LVMH with a very bad eye, Louis Vuitton being the major direct competitor of their company. Indeed, even if LVMH was not subject to the obligation under French law to initiate a PTB following the crossing of the threshold of 33.33 percent in the capital of Gucci (since the fact that the target is listed in the Netherlands brings the potential operation within the scope of Dutch law, which does not require a takeover bid in such circumstances), the first luxury group in the world nevertheless took a dominating position within the capital of the Italo-Dutch leather goods maker.
This is the solution for which Gucci opted in March 1999, following the purchase by Louis Vuitton Moët Hennessy (‟LVMH”) of 34.4 percent of its capital (20,154,985 shares). Four years earlier, Gucci was listed on the New York and Amsterdam stock exchanges at a price of USD22, and five years earlier Domenico De Sole was named CEO of the Italian luxury group, while Tom Ford stepped up to the role of artistic director. These two men viewed the buyback of Gucci shares in January 1999 by LVMH with a very negative view, Louis Vuitton being the major direct competitor of their company. Indeed, even if LVMH was not subject to the obligation under French law to trigger a takeover bid following the crossing of the threshold of 33.33 percent in the capital of Gucci (since the fact that the target is listed in the Netherlands brings the potential transaction within the scope of Dutch law, which does not require a PTB in such circumstances), the leading luxury group in the world nevertheless took a leading position in the capital of the Italo-Dutch leather goods manufacturer.
To counter the attack, Domenico De Sole and his advisers first organised a capital increase by contribution in cash, reserved for employees, within the framework of an Employee Stock Ownership Plan, aimed at diluting LVMH’s share in the capital to 25.6 percent. However, such capital increase was annulled by the Chamber of Enterprises of Amsterdam’s court of appeal because it considered the increase doubtful. While the Chamber of Enterprises invited LVMH and Gucci to negotiate, in its decision of 3 March 1999, Gucci subtly implemented the technique of the white knight: Morgan Stanley, Gucci’s investment bank, suggested launching a second capital increase by contribution in kind, which would be reserved for PPR, a group hitherto unknown in luxury; this would result in the dilution of LVMH’s stake from 34.4 percent to 20.6 percent. Gucci, which wanted to escape LVMH, was enthusiastic but unwilling to make concessions on the sale price of its shares; PPR, which at the same time was negotiating the takeover of Sanofi Beauté, whose assets included Yves Saint Laurent Couture and Yves Saint Laurent Parfums, wanted to diversify into the luxury sector. On 19 March 1999, the Strategic Investment Agreement (‟SIA”) between PPR and Gucci was signed, immediately followed by the capital increase: to acquire 39,007,133 shares, or 40 percent of Gucci’s capital, PPR had to pay USD2.9 billion, or USD75 per Gucci share (while the stock market price at the time was USD60 per share). The Chamber of Enterprises of Amsterdam’s court of appeal refused, in its judgment of 27 May 1999, to cancel this capital increase at the request of LVMH, considering that any target company has the right to defend itself against a ‟inappropriate shareholder who acquires a dominant or significant degree of power”.
The underlying threat, within the strategy of the white knight, is that relations between the said knight and society will deteriorate, and that the first wishes to eventually acquire full control of the company he has previously ‟rescued”.
The standstill clauses and the March 2004 deadline
In order to prevent the white knight from turning into a hostile ‟raider”, companies generally use standstill agreements, which impose certain limits on the investor entering the company’s capital in order to protect the latter from a non-consensual PTB. Thus, the share purchase agreement will limit the percentage of shares that the white knight can acquire, in addition to the shares previously obtained as part of the defensive strategy against the PTB attempt, for a specific period of time called ‟standstill period”.
In order to optimize relations between Gucci and PPR, the SIA included a five-year standstill period (until 2004) during which PPR agreed not to increase its stake in Gucci’s shareholding to more than 42 percent. Gucci’s autonomy was also preserved by additional clauses providing for the non-competition between PPR and Gucci as well as the assurance of Gucci’s independence. Between June 1999 and November 2000, LVMH appealed against the decision of the Chamber of Enterprises of the Amsterdam’s court of appeal of 27 May 1999, and brought five actions before the District Court of Amsterdam against Gucci, in order, among another, to cancel the SIA as well as the capital increase in favour of PPR. Following two and a half years of negotiation, the three parties involved (Gucci, PPR and LVMH) reached a consensus, adopting a share repurchase agreement (the ‟Agreement”) and amending the SIA on 9 September 2001.
The Agreement provided for the resolution of the conflict between the three companies in three stages, in order to lead to the withdrawal of LVMH from the 20.6 percent share held in the capital of Gucci; in return for which LVMH, Gucci and PPR agreed to withdraw all ongoing complaints and legal actions relating to the shares in the shareholding of LVMH, PPR and Gucci. Initially, PPR undertook to acquire on 22 October 2001, 8,579,337 shares (representing 8.6 percent of Gucci’s capital) from LVMH, at a price of USD94 per share. In a second step, an exceptional dividend of USD7 per share was to be paid by Gucci to all its shareholders except PPR, by 15 December 2001 at the latest. Finally, PPR agreed to launch a PTB for Gucci’s minority shareholders (including LVMH) on 22 March 2004, at a price of USD101.50 per share in order to acquire the balance of Gucci’s capital; this commitment being accompanied by penalty clauses in the event that PPR decided not to make this offer for a reason other than force majeure (LVMH and Gucci would then have the right to claim damages from PPR and Gucci could distribute dividends in shares, which would reduce PPR’s stake in this company to 42 percent). A standstill clause with regard to LVMH was inserted in the Agreement, since from 9 September 2001 to 31 December 2009, LVMH and its subsidiaries could not acquire shares of the Gucci group, except to launch a PTB out of 100 percent of Gucci shares, following the prior authorisation granted by the Board of Directors and independent directors of Gucci. LVMH will also not be able, during this period, to interfere in the management of this company and has undertaken to be a passive shareholder, only exercising its rights to receive dividends and vote at general meetings. On 17 December 2001, following the completion of the first two stages of the Agreement, LVMH sold the 11,565,648 shares remaining in its possession (representing 11.5 percent of Gucci’s capital) to Crédit Lyonnais, at an average price of USD90 per share, completely divesting from the capital of the Italian luxury company. Thus, Gucci succeeded in keeping LVMH at a distance, with the Agreement, and also took advantage of the renegotiation of the SIA to modify the standstill clause which bound it to PPR.
In the new SIA, PPR has undertaken to acquire only 70 percent of Gucci’s capital during a period of standstill, which will end either on the date of execution of the PTB in March 2004 (provided that minority shareholders hold no more than 15 percent of Gucci’s capital or no more than 15 million Gucci shares in their possession); or, if the offer does not take place, on the expiry date of the new SIA (19 March 2009). Consequently, PPR cannot acquire more than 70 percent of Gucci shares, in particular through stock pick-ups on the secondary market, before the PTB in March 2004.
PPR’s refocusing strategy: the creation of the world’s 3rd largest luxury group
To acquire the 60 percent of Gucci it held on 1 March 2003, PPR has already spent 4.6 billion Euros, and it plans a budget of an additional 1 billion Euros (based on an estimate from 85 to 90 Euros per share) to raise its stake in Gucci’s shareholding to 70 percent before the PTB. Since this last financial operation should have a cost of 3 billion Euros, the refocusing of PPR on the luxury sector amounts to 8.6 billion Euros. Hence the need for PPR, which debt ratio stood at 76 percent at the end of 2002, to sell its non-strategic assets (such as the distribution brands to professionals and financial services), in order to generate sufficient cash flow to repay the group’s debt and to finance the Gucci transaction. At the same time, PPR rescheduled its debt, by issuing bonds (called ‟Océanes”) for an amount of 940 million Euros in mid-May 2003.
The restructuring of the PPR group, both sectoral and financial, is underway; its culmination being the March 2004 PTB by which the company founded by François Pinault should obtain control of the entire capital of Gucci. If financial engineering will make it possible to achieve this result, the most ambitious challenge that PPR will undoubtedly have to meet consists in mobilising a close-knit management team motivated by the group’s success in the luxury sector, and in the expansion of the market share of the restructured entity in this high profit margins’ industrial sector.