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Storms, Terrorists, Nuke Tests Why Is Club Med Smiling? (Int'l Edition)

International -- Intl' Business: FRANCE


Times have been rough for France's Club Mediterranee. In June, one of its Israeli vacation villages had to close for a year, after a terrorist attack. Last month a hurricane demolished a village on the Caribbean island of St. Martin. Now, French nuclear tests in the South Pacific are costing the Club around $1 million a month in lost revenue, as outraged Japanese and Australians shun its Polynesian resorts.

Despite these troubles, Serge Trigano, chairman of the famed marketer of holiday hedonism, is in a bubbly mood. After years of poor profits or outright losses, the company has finally brought runaway costs under control. And worldwide, business at the $1.8 billion company is strong enough to offset the setbacks in Israel, St. Martin, and Polynesia, which Trigano shrugs off: "Risks like that are normal when you operate in exotic places." So for the year ending Oct. 31, Club Med will deliver a profit increase of 87% (chart). Investors may not be as exuberant as Trigano: They still grumble, for example, about the Club's 4% return on equity. But at the same time, they think Trigano may finally be on the right course.

VIRGIN TERRITORY. Perhaps the best sign of that mounting confidence is a high-profile investment by the Agnelli family, which controls Fiat. In late September, a French company owned by the Agnellis agreed to increase its Club Med holding from 3% to 13% by purchasing a stake from troubled Credit Lyonnais. The Agnellis and other shareholders will also kick in $180 million of new capital to help reduce $700 million in debt, refurbish aging villages, and finance expansion.

Trigano, who succeeded his father Gilbert as CEO last year, wants to add 20 new villages over the next five years to the 110 that he has now. He also vows to tighten up costs even more, something his father did only in his final year on the job, when he cut the payroll by 10%. The son is bringing in more professional managers, including a respected marketer from Sony. The market is pleased but still wants more. At $97 a share on the Paris bourse, the stock is up 50% from its 1993 low but still well below its 1990 high of $142.

Club Med's stocky, energetic chairman is counting on success in Asia to boost the shares further. Unlike Europe, where lower-priced imitators have cut into the market, Asia is almost virgin territory. Club villages there operate all year, while many European resorts are shuttered during the rainy winter months. And costs are lower. Trigano won't confirm it, but analyst Nigel Reed of Paribas Capital Markets Group in London figures Club revenues in Asia--10% of its total--generate 35% of profits. Trigano thinks Asia may produce 25% of revenues in five years.

So it's no surprise that half of the new clubs planned will be in Asia, where 10 Club Meds already have operations. Trigano is negotiating with local partners over building two villages in China. He's also considering expansion in Taiwan, South Korea, and India. To keep debt under control, these would be built and owned by local investors but managed by Club Med.

The French are also taking pains to coddle Asian clients. For example, the Club learned that Japanese tourists crave infinite detail in their travel plans. So, along with brochures and activity schedules for the villages they'll visit, Club Med sends them maps of the airports at both ends of the trip, showing toilets, customs booths, and other facilities. "What they want is unbelievable," says Trigano. "But they're great consumers." As for the political fallout from nuclear testing, Trigano says that "people eventually forget." Then, barring a rash of typhoons and earthquakes, investors hope the money will roll in.By Stewart Toy in Paris

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