So long oil patch, hello Paris. That sums up the strategy of Brazos Europe Inc., a little-known private-equity group made up of former associates of billionaire Robert M. Bass, the famous Texan investor. They've made their fortunes in everything from distressed real estate in Canada to oil and gas deals in Chile. Now the Washington (D.C.)-based Brazos expects to strike gold again, this time in the European luxury market.
For starters, the two principals, Bernard J. Carl and Shannon Fairbanks, are investing about $25 million to acquire and develop D. Porthault, the family-owned maker of ultra-upscale linens and one of France's most prestigious luxury brands. They're following up with a $300 million fund to invest in French family businesses, with an emphasis on luxury deals. Fluffy French pillowcases and intricate floral embroidery don't sound like they're in the same league as oil and gas, yet Brazos sees plenty of dollar signs amid all the frills. Says Brazos President Carl: "Porthault is one of the most massively underexploited brands out there."
It's easy to see the appeal of European luxury brands these days. French giants like LVMH Moët Hennessy Louis Vuitton, with such brands as Louis Vuitton and Fendi, and PPR, which owns Gucci and Yves Saint Laurent, are logging record profits as the carriage trade expands across the globe. Yet operating under the radar of these titans is a constellation of small, family-owed French luxury businesses that are holding on for dear life. The French government estimates there are about 3,000 treasured artisanal firms designated Entreprises du Patrimoine Vivant, or companies of France's living heritage, about a third of which serve the luxury market. These businesses, says Renaud Dutreil, the Minister of Small & Medium Businesses, are part of "the genetic code of France."
CREAKY FACTORY Many are also low-hanging fruit for the likes of Brazos. Small luxury companies, often in the same family for centuries, are in need of fresh ideas, new talent, capital, and modern distribution. And the money is starting to come in. Last year Asim Abdullah, a Pakistani-American dot-com billionaire, purchased the once-hot French couturier Emanuel Ungaro from an Italian luxury company. Christofle, the renowned maker of luxury tableware, recently sold a roughly 20% stake to Japanese investment company BSL Corp. And Lanvin, the haute couture fashion house, is now owned by a Chinese group.
Of course, plenty of outsiders have lost money trying to play in the closed world of French luxury. But Brazos figures the time is right to move in, and it sees Porthault as the perfect place to start. Porthault's factory in the north of France dates to the 1940s, its creaky machinery is even older. Spotty production meant it had to turn down offers to supply Harrod's and other upscale chains.
Yet Porthault products have long held a powerful appeal for an upscale niche under its longtime chief, Marc Porthault, the founders' son who once collaborated on a history of linens called Rêves de Blanc. Porthault linens and bath towels have graced the Kennedy White House and the country homes of Britain's royal family. Celebrities, too, love to shell out up to $4,600 for a set of Porthault's signature color-splashed, silky sheets, some decorated with tiny jewels. At an October opening of Porthault's new boutique on tony Avenue de Montaigne, among those running their fingers through the company's selections were actresses Catherine Deneuve and Gwyneth Paltrow.
`MADE IN FRANCE' PREMIUM Brazos' strategy is to increase the company's annual sales from just $7 million to about $75 million within seven years. The plan is to open a dozen or more elegant stores from San Francisco to Moscow to Tokyo and to expand into the U.S. luxury hotel industry. Under a new American CEO, Alexander Vreeland, a former marketing executive for Giorgio Armani, Porthault is creating its first catalog and Web site and expanding its offerings to include upscale nightgowns and tableware. Because luxury brands tend to sell for one to two times sales, Carl is confident Brazos can realize at least a 30% annual rate of return over the life of its investment.
Key to that strategy is keeping prices for Porthault's products high by maintaining quality and manufacturing only in France. Says Carl: "You have no idea how much people are willing to pay for the `Made In France' label."
But Brazos will need to steadily increase Porthault's output to supply its growing distribution. The company has built a $6 million, state-of-the-art textile factory, partly paid for by the French government. Computer files will replace the crumbling, hand-written cardboard instructions on which the company's 2,000 or so patterns had been stored. Once sheets are produced in the new factory, they will move to the finishing crew, about 100 or so highly skilled seamstresses trained from one generation to the next in the elaborate embroidery that Porthault fans crave.
Will this bet pay off? The American team has a rough road ahead. Just trying to figure out the company's margins is a brain-twister. Because of decades of antiquated internal record-keeping, "I don't have any level of confidence in our numbers right now," says Vreeland. But there's no turning back. In the small town of Rieux in the northeast corner of France, workers are putting the finishing touches on the new factory set to open in January. French government officials will attend. And Vreeland and Marc Porthault will embrace for the cameras. For Rieux, the opening could mean prosperity for years to come. Brazos is hoping for the same.
By Eric Schine, with Carol Matlack in Paris