PPR Spinoff of Fnac May Signal Lack of Buyers for Retail Chain

Since it made the decision to concentrate on luxury and sporting-goods almost three years ago, PPR SA (PP) has had more than a few distractions.

A simple plan to exit businesses that didn’t meet the strategy has proved anything but, as the owner of the Gucci brand has struggled to sell the Redcats online retailing unit and the Fnac music and electronics chain.

PPR’s board will vote today on a plan to spin off Fnac, according to an Oct. 7 report in Le Figaro. The separation of the unprofitable unit would take place as soon as June, the newspaper said, citing unidentified people. Paul Michon, a spokesman for PPR, declined to comment.

“PPR may have chosen this solution as it has not yet found any buyer,” Loic Morvan, an analyst at Bryan Garnier, wrote in a note yesterday, referring to a possible spinoff of Fnac. He estimates the unit’s value at 800 million euros ($1.04 billion).

PPR gained 2 percent to 124.15 euros in Paris trading yesterday on the possibility that Fnac may be spun off.

The shares trade at a discount to luxury peers such as LVMH Moet Hennessy Louis Vuitton SA (MC) and Cie. Financiere Richemont SA because Redcats and Fnac are less profitable and have weaker growth prospects. The company’s estimated price-to-earnings ratio for this year is 13.4 times. The ratio of the Bloomberg European Fashion Index is 18.6 times.

Shoppers Reeling

PPR is betting that rising demand for branded clothing and accessories in emerging markets will help double sales to 24 billion euros by 2020. Yet, after selling furniture retailer Conforama last year and in July agreeing to dispose of its remaining stake in African distributor CFAO, the company still has to resolve the future of its other unwanted assets.

Fnac and other store-based retailers of books, music, film, video games and hardware such as Apple Inc.’s (AAPL) iPad, are reeling as shoppers increasingly buy those and other goods online and as Europe’s debt crisis weighs on demand. Metro AG, the German owner of the Media-Saturn electronics business, last week cut its 2012 profit forecast, saying Europeans are spending less.

“Consumer electronics are among the first categories to suffer in a recession,” said Boris Planer, a Frankfurt-based analyst at Planet Retail. “Retailers must invest heavily in online business as every 15-year-old has a mobile phone and consumers’ way of shopping is changing.”

Redcats Sale

Fnac sales, which reached 4.16 billion euros in 2011, have declined every year since 2008. The 58-year-old company gets more than two-thirds of revenue from France, which is teetering on the brink of recession, and more than half from consumer electronics. Fnac had 159 stores at the end of June, including in Belgium, Brazil, Morocco, Portugal, Spain and Switzerland. The Internet accounted for 12 percent of first-half sales.

Fnac, which reported a 7 million-euro first-half operating loss as same-store sales fell 1 percent, is facing “profound difficulties,” said Christian Devismes, an analyst at CM-CIC Securities.

PPR restated 2010 accounts in February to classify Redcats and the Italian unit of Fnac as “discontinued operations, sold or to be sold.” There has been no private-equity interest in Fnac Italy, leaving only industrial companies as potential acquirers for the business, PPR managing director Jean-Francois Palus said in February.

A challenging debt market has made Redcats too expensive for bidders to buy in one block leading PPR to try to sell the online retailer in pieces, people familiar with the matter told Bloomberg News in July.

The French company will make an announcement concerning its disposal of Redcats before it presents third-quarter results on Oct. 25, Chief Executive Officer Francois-Henri Pinault said last week. The process is ongoing, he said Oct. 4, declining to provide further details.

To contact the reporter on this story: Andrew Roberts in Paris at aroberts36@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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