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GENEVA, Switzerland — LVMH's Tiffany acquisition dramatically changes the picture for Compagnie Financière Richemont, the Swiss luxury conglomerate that owns Cartier, Van Cleef & Arpels and Chloé, among other brands. For one, it takes LVMH out of the running as the most suitable bidder for Richemont — at the very least for a few years. A blue-sky mega-merger would be the ultimate move in luxury consolidation: the two groups are highly complementary and, together, would have a leading position in virtually all personal luxury goods categories. But the likelihood of such a development is dramatically lower following the LVMH-Tiffany deal.
The acquisition also increases pressure on Richemont with a more relevant competitive threat in jewellery. LVMH has built an excellent track record in relaunching and developing Bulgari over the past eight years: Bulgari has consistently gained market share against hard-luxury incumbents such as Cartier since LVMH snapped up the Italian jeweller. If the group achieves a Bulgari-like success in turning Tiffany around, this would dial up the pressure on Richemont, adding to competitive threats from couture and leather goods mega-brands moving into jewellery, from Chanel and Hermès to Louis Vuitton and Gucci, to name just a few.
Richemont can take this on its proverbial chin and pretend nothing is amiss, or it can counter-attack. High profile M&A would address many of the biggest issues Richemont is facing today, unlocking material value for shareholders.
A stand-alone Richemont is at an increasing competitive disadvantage.
At present, Richemont remains vastly below critical mass in soft luxury. While we salute the arrival of Alber Elbaz, a creative genius, the problem of creating material value with brands such as Chloé, a potential star in the right hands, remains unsolved. Richemont also owns the best and largest soft luxury multi-brand e-retailer… but for what, exactly? Synergies between Richemont's core business and YNAP are negligible. YNAP within a larger luxury conglomerate would become a genuine strategic asset overnight in a similar vein to DFS in travel retail, or Sephora in beauty retail. What's more Richemont has shrunk relative to competitors in recent years, just when scale is becoming more vital than ever in the face of growing market complexity. A stand-alone Richemont is at an increasing competitive disadvantage.
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A Tie-Up With Chanel
Last year, after a century of absolute secrecy, Chanel began publishing its financials and speculation on a possible LVMH takeover, though dismissed by Bernard Arnault, has been rampant. Chanel may choose to go for a plain vanilla IPO — which has been dismissed by Chanel — in a similar vein to Hermès more than twenty years ago. Or it may go for something more exotic. We see several advantages in a blue-sky Chanel and Richemont tie-up.
Chanel and Richemont are highly complementary, with dovetailing strengths and weaknesses in the most relevant product categories: Chanel is a master of soft luxury and beauty, Richemont is a master of hard luxury and soft luxury digital retail. A Chanel and Richemont merger would be an astounding equity story, prized by investors. In fact, this would create the second largest group in the luxury goods industry overnight, offering a solid alternative to long-term investors, who are now all virtually focused on LVMH. Such a tie-up would also unlock material value.
A Chanel and Richemont merger would be an astounding equity story, prized by investors.
Richemont is vastly undervalued in our sum-of-the-parts valuation (SOTP). But, on its current trajectory, it is gaining no friends and actually risks sliding to pariah status: its return on invested capital (ROIC) performance in the past ten years has been disappointing. Chairman Johann Rupert is known to be a savvy financial investor and it is difficult to imagine that this problem is not on his radar screen. Transformative M&A, such as a merger with Chanel, would go a long way to address this. Industry sources report that the Wertheimer brothers, who own Chanel, see €100 billion as a fair valuation for Chanel. This would be in line with the current enterprise value-to-sales multiple of Hermès. Maybe an IPO would provide this some years from now, assuming Chanel was able to emulate its Parisian peer on profit performance, too, which is no small feat. A transformative market entry would likely provide a shortcut to a punchy valuation.
A Merger With Kering
Kering has done a lot to deserve higher credit in the industry. In recent years, the company has divested its general retail assets — as well as Puma — to become a luxury goods pure play, which we always believed was the best way to create shareholder value. Kering has also been able to take most of its soft luxury brands to unprecedented heights: Gucci, Bottega Veneta, Saint Laurent and Balenciaga now offer something of a "Kering template" to revivals.
And yet, now, as before, the most important hurdle to this scenario is ego and controlling shareholders. Back when we published a report suggesting a Richemont-Kering tie-up, the feedback we received from Richemont at the highest level was that the company regretted not having bought Gucci from Maurizio himself when they could have done so on the cheap. With Kering now valued almost ten times what it was worth back then (and Richemont only four times), the gap between the two has become even more pronounced. One of the key issues would be how to reward the voting rights majority held by the Rupert family in a way that could be both attractive for the Ruperts and acceptable for public shareholders.
Luca Solca is head of luxury goods research at Bernstein.
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