Bulgari Takeover 82% Costlier Than Hermes for LVMH: Real M&A

LVMH Moet Hennessy Louis Vuitton SA CEO Bernard Arnault
Bernard Arnault, chairman and chief executive officer of LVMH Moet Hennessy Louis Vuitton SA. Photographer: Antoine Antoniol/Bloomberg

Six weeks after LVMH Moet Hennessy Louis Vuitton SA said it wouldn’t overpay for acquisitions, the world’s largest maker of luxury goods is now spending more than ever to purchase Bulgari SpA.

LVMH, which sells everything from Louis Vuitton bags to Dom Perignon champagne and Royal Van Lent yachts, agreed yesterday to pay 3.7 billion euros ($5.2 billion) for the Rome-based watch and jewelry maker in its biggest takeover in at least a decade, according to data compiled by Bloomberg. Including net debt, the deal values Bulgari at as much as 28.2 times earnings before interest, taxes, depreciation and amortization, higher than LVMH has offered for any other company and 82 percent more than it paid for a stake in Hermes International SCA in October.

Chief Executive Officer Bernard Arnault, who built Paris-based LVMH through acquisitions over more than two decades, is paying the biggest premium in 10 years to gain control of the world’s third-largest jeweler from Bulgari’s founding family. While Bulgari’s earnings slumped 67 percent in the past three years and the company has a lower operating margin than any of its largest rivals, Arnault is betting he can boost profitability as Bulgari’s sales reach a record this year.

“It’s priced on the assumption that they’ll do well with it,” said James Moffett, who helps oversee $20 billion in Kansas City, Missouri, at Scout Investments, which owns about 675,000 shares of LVMH. “They’re obviously paying a fairly full price for it. There’s always a risk that it doesn’t work.”

‘Skilled Operators’

Still, “they’re skilled operators and they’re used to dealing in the luxury-goods business,” Moffett said. “There are a lot of ways that they could mess it up, but the odds are that they won’t.”

LVMH, founded in 1987 from the merger of Moet Hennessy and Louis Vuitton, has completed more than two dozen acquisitions in the past decade as Arnault forged a luxury goods maker now valued at $77 billion. Sales have almost doubled in that span to 20.3 billion euros, Bloomberg data show.

Bulgari would be Arnault’s biggest takeover attempt since shareholders rejected his $6.15 billion bid for Gucci Group NV in 1999, the data show.

LVMH will buy the 50.4 percent stake owned by Bulgari’s founding family using stock and then make a tender offer for the rest in cash, the companies said yesterday. The deal values the family’s stake at 1.91 billion euros, while LVMH’s 12.25 euro per share offer to minority investors will cost almost 1.84 billion euros, data compiled by Bloomberg show.

Convertible Bond

Including options and the purchase of a convertible bond, the company is paying a total price of 4.3 billion euros, LVMH said on a conference call yesterday.

The stock portion of the acquisition gives Bulgari an enterprise value, or its equity and debt minus cash, of 4.04 billion euros, or 28.2 times its Ebitda of 143.3 million euros in the past 12 months, data compiled by Bloomberg show. The tender offer was struck at 25.8 times Bulgari’s Ebitda.

LVMH’s deal for the controlling stake held by Bulgari’s founding family would be more than twice as expensive as the median Ebitda multiple of 11.9 times the company has historically paid in acquisitions, Bloomberg data show.

The 12.25 euro offer to minority shareholders is a 60 percent premium to Bulgari’s average share price in the 20 days prior to the announcement, data compiled by Bloomberg show. That’s the biggest since the 115 percent premium for the purchase of Donna Karan International Inc. completed in 2001.

“LVMH is paying a hefty premium, there is no way around it,” Luca Solca, a London-based retail analyst at Sanford C. Bernstein & Co., said yesterday.

‘Very Picky’

Philippe Pascal, LVMH’s then-head of watches and jewelry, said earlier this year that the company wasn’t in a rush to pursue acquisitions and wouldn’t overpay.

“We will not bid too high,” he said. “We are very picky.”

LVMH said yesterday that Bulgari CEO Francesco Trapani will replace Pascal, who will remain on the company’s executive committee and be given new responsibilities in the group.

In October, LVMH acquired a 17.1 percent stake in Hermes for 1.45 billion euros, valuing the transaction at 15.5 times Ebitda, or almost half as much as the Bulgari deal, data compiled by Bloomberg show.

Hermes, the Paris-based maker of Birkin and Kelly bags, has said it isn’t interested in collaborating with LVMH, which has built a 20.2 percent stake.

“If you want to seduce a beautiful woman, you don’t start by raping her from behind,” Hermes CEO Patrick Thomas said on March 4 at a presentation in Paris.

Active Investor

Hermes wants LVMH to reduce its stake by more than half, according to Bertrand Puech, who heads the bag maker’s founding family. LVMH has said it doesn’t plan to sell its stake and that it doesn’t intend to be a passive investor.

The company is currently valued at 24.2 times Ebitda, which will make any potential bid by LVMH more expensive. The 28.2 times Ebitda that LVMH paid for Bulgari would value Hermes’ equity at almost 18.9 billion euros. That would equal a 16 percent premium to Hermes’ share price yesterday.

Prior to the takeover announcement, LVMH had gained 38 percent in the past five years, while Bulgari declined 27 percent. Hermes more than doubled in the same period, data compiled by Bloomberg show.

LVMH’s takeover of Bulgari will double the size of LVMH’s watches and jewelry unit, which currently includes Tag Heuer timepieces and De Beers diamond necklaces. Bulgari’s sales will climb to a record 1.16 billion euros this year, according to analysts’ estimates compiled by Bloomberg.

Watch Sales

LVMH gets about 4.9 percent of its sales from watches and jewelry, compared with 68 percent for Bulgari, the data show.

Bulgari retained about 63 cents per dollar of revenue in the past 12 months, after subtracting costs to produce its goods, more than double the median for global jewelry retailers with more than $1 billion in market value, data compiled by Bloomberg show.

Deducting Bulgari’s selling, general and administrative expenses reduces its operating profit to 3.3 cents per dollar of revenue, the lowest among jewelry sellers that analysts estimate will have more than $1 billion in sales this year, data compiled by Bloomberg show.

Tiffany & Co. of New York, the world’s second-largest luxury jewelry retailer, had an operating margin of 18 percent. Geneva-based Cie. Financiere Richemont SA, the biggest jewelry maker, had a margin of almost 20 percent, according to data compiled by Bloomberg.

‘The Rationale’

The Bulgari takeover is “clearly ambitious,” said Rene Weber, an analyst at Bank Vontobel AG in Zurich. It’s “one of the most expensive deals ever seen in the industry,” he said.

Still, “there is a big potential for higher margins,” Weber said. “That’s the rationale.”

Elsewhere in mergers and acquisitions, Western Digital Corp., the largest maker of computer hard-disk drives, agreed to buy a rival unit of Tokyo-based Hitachi Ltd. for about $4.3 billion in cash and stock to reduce costs.

Western Digital will pay $3.5 billion in cash and give Hitachi 25 million of its shares, according to a statement yesterday. Hitachi will own about 10 percent of Irvine, California-based Western Digital after the deal is completed.

Terumo Corp. of Tokyo, Japan’s largest medical device maker, agreed to buy Gambro AB’s CaridianBCT unit for $2.63 billion, including debt, to become the world’s biggest maker of blood-transfusion equipment.

There have been 4,171 deals announced globally this year, totaling $413.2 billion, a 31 percent increase from the $314.8 billion in the same period in 2010, according to data compiled by Bloomberg.


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