Arnault Is Shopping For Perfume, Luggage...

In his office above Christian Dior's elegant Paris store, Bernard Arnault, France's "king of luxury," fairly gloats at the prospect of spending the $1.9 billion that will soon fall into his lap. "We're going to buy more luxury companies," he promises, especially in cosmetics, perfume, and luggage. He's eager to add such products to the power brands of Givenchy, Mo t & Chandon, and Vuitton--all already owned by LVMH Mo t Hennessy Louis Vuitton, the company that Arnault runs as chairman and controlling stockholder. A choice target he's considering, some well-placed sources tell BUSINESS WEEK: French cosmetics giant L'Oreal.

That would be quite the purchase: At $6 billion in sales, L'Oreal is 50% bigger than LVMH. But acquiring big-ticket items comes naturally to the 44-year-old Arnault, who turned a wreck of a textile maker into the world's largest luxury-goods conglomerate. The money comes from a stock deal announced on Jan. 20 with Guinness PLC, the British brewer and distiller. Guinness will sell its 24% stake in all of LVMH and buy 34% of Mo t Hennessy, LVMH's champagne-and-cognac business. The swap adds $1.9 billion to LVMH's coffers, while a separate company, Arnault-controlled Christian Dior, buys Guinness' LVMH stake. Arnault will use the cash to cut debt until he lands a takeover.

L'Oreal may be that takeover. Arnault has avoided mass-market specialties, but he says: "I would buy a mass-market company if it's strongly established." In March, an agreement expires that blocks L'Oreal's sale by its two major owners, Swiss food giant Nestl and French heiress Liliane Bettencourt. Arnault apparently covets Nestl 's 49% share of a holding company that owns 51% of L'Oreal. The problem, skeptics point out, is that Nestle may not be selling. Neither is Bettencourt: But for a controlling stake in L'Oreal, Arnault would have to buy at least some shares from the 71-year-old billionaire.

If L'Oreal doesn't pan out, analysts think Arnault might pursue French drug maker Sanofi, now owned by oil giant Elf Aquitaine. Last year, Sanofi bought fashion-and-perfume house Yves Saint-Laurent. LVMH could keep Sanofi's cosmetics and perfume and sell the rest.

SMART MOVE. While the king of luxury schemes to become emperor, some analysts are trashing the Guinness deal as a way for Arnault to strengthen his hold on LVMH and free himself of any outside control. Indeed, Guinness executives are thought to have questioned Arnault's purchase of two French business publications--even though Arnault says he bought them only to block foreign buyers.

Now, Guinness' only exposure to LVMH's fortunes is in the Moet Hennessy line, which it already distributes in many countries. It's a smart move, according to Lehman Brothers analyst John Wakely, since the plunging prices of the grapes used in champagne and in the eau devie for cognac should drive profits up. "Guinness got a steal," he says. Reflecting this reasoning, the market bid Guinness shares up 10% after the announcement. LVMH shares dropped 3.4%, then recovered.

The market's sentiment surprises LVMH's chairman. The margins on perfume and luggage are triple those of bubbly and brandy, says Arnault. Also, Vuitton's formerly flat sales rose 20% in 1993. This swing away from the drinks business, he adds, will boost LVMH's recession-diminished profits. Whether those extra profits materialize or not, Arnault seems eager to roll out the dealmaking weaponry.

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