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Arnault Takes Fiscal Control of Guerlain

PARIS -- Bernard Arnault, the king of French luxury goods, has acquired financial control of Guerlain SA, one of the country's most prestigious fragrance houses.<BR><BR>But the Guerlain family, while receiving an estimated $343.5 million in stock,...

PARIS — Bernard Arnault, the king of French luxury goods, has acquired financial control of Guerlain SA, one of the country’s most prestigious fragrance houses.

But the Guerlain family, while receiving an estimated $343.5 million in stock, will also be left with a narrow control of the voting. The fragrance firm has been in the Guerlain family for 166 years.

The deal, disclosed here late Friday, calls for Arnault’s LVMH Moet Hennessy Louis Vuitton SA to acquire a majority stake in Guerlain following a two-step transaction.

The Guerlains will turn over 49.9 percent of Djedi, the family holding company, which owns 85.8 percent of Guerlain’s capital, to Christian Dior SA, a holding company of LVMH, in exchange for Dior stock.

In addition, Christian Dior will receive an additional 2 percent of non-voting shares in the holding company from Jean-Pierre Guerlain, head of the holding company’s board, who is in his late 80s.

Arnault announced that in turn Dior would sell this newly acquired interest in Djedi to its affiliate LVMH, which already directly owns 14.2 percent of Guerlain.

This would put 58.7 percent of Guerlain’s capital in LVMH’s hands. The Guerlain family, however, retains bare voting control by virtue of its remaining 50.1 percent share of Djedi.

“In economic interest we hold the majority, but [the deal] is on two levels, as Guerlain is controlled by Djedi,” said Arnault, underscoring the complexity of the acquisition.

In exchange for these shares, Guerlain family shareholders will get 4.35 million shares in Christian Dior, which represents 12 percent of the expanded Christian Dior stock pool.

The sale price of $343.5 million (1.9 billion francs) at current exchange rates is the Arnault’s estimate of the value of the Dior shares the Guerlain family will receive.

The Guerlain family has an option to sell its remaining Djedi shares to Dior, and Dior has the right of first refusal.

“The reason for this operation is that the Guerlain family didn’t want to sell,” said Arnault. “They wanted an association with a group to insure the integrity of the company by keeping voting rights. We have agreed that all important decisions will be taken together, anything from investments and strategy to appointments.”

Arnault said the Guerlains chose Dior instead of LVMH “because they didn’t want to sell directly, and in exchange they wanted to get Dior shares, as Dior [controls] LVMH.”

The announcement came as no surprise to analysts, who have long been expecting Arnault to move deeper into Guerlain. Anticipation was also heightened after LVMH sold 34 percent of its beverage business — Moet Hennessy SA — to Guinness PLC, the Britain-based alcoholic beverage complex. Arnault said Friday that Guinness paid $1.4 billion (8 billion francs).

“There will be some synergies, in distribution, and also due to the sheer size of the new group,” said Jean-Marie L’home, an analyst with BZW Puget Mahe. “It’s also a nice way to get cash for Dior from LVMH,” he pointed out.

Under the terms disclosed Friday, LVMH will pay Dior cash for the Guerlain interest.

“Everyone assumes that within a few years, LVMH will own all of Guerlain,” L’home added.

Advised by J.P. Morgan, the Guerlain family will become the second largest shareholder in Dior, which is majority-owned by Au Bon Marche. Au Bon Marche, along with Dior, is part of Arnaut’s network of holding companies, through which he controls LVMH. Arnault is LVMH’s chairman.

Arnault said no management changes are planned at Guerlain for the time being.

“Jean-Paul Guerlain, the house’s [perfumer and creative force], will of course keep his position,” he said.

Guerlain family members will be joining Christian Dior management. Eric Guerlain will become vice president of the Dior board, and Edouard Guerlain will be a director of Dior.

Arnault emphasized that the management of Guerlain and Dior will remain separate and Dior perfumes will stay autonomous.

“But it doesn’t mean we won’t try to get all the advantages of a partnership with a group like ours in advertising investments, where we get preferential rates in distribution and opening shops as well as in human resources. We’ll help Guerlain in its international development,” said Arnault.

He added that Guerlain had a strong presence in the French market and ample development potential abroad.

“Our market shares are not that high in the cosmetics industry, especially compared with L’Oreal,” said Arnault. “But L’Oreal is more mass market.

“In the selective, prestige brands, with Guerlain, we must be number one in France,” said Arnault, estimating a 20 percent French market share.

In 1993, Guerlain’s sales came to $350.8 million (2 billion francs) at current exchange rates, with consolidated net profits of $28.4 million (162 million francs).

In 1992, the latest year for which breakdowns were available, Guerlain’s worldwide business was 63 percent fragrance, 19 percent color cosmetics and 18 percent treatment.

The U.S. then accounted for 15 percent of the 1992 global total, or $54 million. In 1993, 85 percent of U.S. sales was generated by the firm’s 22 fragrances, with color cosmetics accounting for 12 percent and treatment 3 percent. Shalimar, Guerlain’s 1925 classic women’s scent, was responsible for 52 percent of 1993 U.S. sales.

According to sources, Samsara, a women’s scent launched in 1989, had grown to $14 million wholesale in the U.S. by October 1993, compared with about $30 million for Shalimar.

Cosmetics industry consultant Allan J. Mottus said, “Guerlain is now well-protected for the next several generations. [The Guerlains] had realized that worldwide, they weren’t as much of a player anymore.

“Now Arnault has three of the top prestige brands in the world in Dior, Givenchy and Guerlain,” Mottus continued. “If he can coordinate his brands here in the U.S., he’ll be a major power. The important thing is to keep [Guerlain] as its own brand.”

Mottus said the company had made a mistake in the U.S. by relegating its cosmetics and treatment line to its in-store boutiques. In addition to being expensive to maintain, the boutiques are usually situated away from the cosmetics traffic, he said.

The cosmetics line — which Mottus called “young and funky” — should be given a much more high-profile exposure, perhaps its own space in 130 to 150 department store doors, he said. He also suggested that Guerlain could open four or five freestanding stores in the U.S.

Mottus asserted that the Paris-based L’Oreal also had been interested in acquiring Guerlain. “They wanted it very badly,” he said.

However, executives at Cosmair, L’Oreal’s New York-based licensee, said they had no knowledge of any such interest.

The Guerlain family and LVMH apparently kept its Guerlain negotiations so tightly under wraps that the deal came as a surprise to many of the employees. Even Guerlain employees at offices in Paris, London and New York said they had not been informed.

Another surprised onlooker was Joseph Cicio, chairman of I. Magnin in San Francisco.

“I just met with them in Paris about a month ago,” he said, “and I just met with Patrick Waterfield [the new president of Guerlain’s U.S. subsidiary] in San Francisco and Robert Guerlain [director of special projects].”

Cicio said he was very impressed with Waterfield and the company’s “very realistic plan of direction,” including efforts to make the line less intimidating to younger, more contemporary consumers while still protecting the quality of the Guerlain name.