LVMH: A DEAL FOR DONNA

Byline: Lisa Lockwood / With contributions from Robert Murphy / Miles Socha, Paris

NEW YORK--Donna Karan called it "Operation Karma."
That was the the code name for the top-secret negotiations between the designer and LVMH Moet Hennessy Louis Vuitton that took place over the last several weeks in Paris.
"I've always perceived it as a personal thing," Karan said of the negotiations, in an exclusive interview at her office Monday. "You know when something's going to happen. It was inevitable."
LVMH, in the latest in a blistering series of acquisitions and investments, will pay $450 million to buy Gabrielle Studio, the privately held licensor of the Donna Karan trademarks, owned by Karan and her husband, Stephan Weiss and through which the designer licenses the company's various labels back to Donna Karan International Inc.
In addition, LVMH submitted a proposal to the board of Donna Karan International--the publicly traded firm whose revenues last year were $656.8 million--to buy the company's 23 million shares for $8.50 a share, or about $195 million.
Viewed by Wall Street analysts as a bargain basement price, especially at a time when luxury brands often command sky-high multiples, the deal for Donna Karan International is completely separate from the Gabrielle Studio deal. Theoretically, the LVMH offer could open the door for other suitors to bid higher, however, that's viewed as something of a long shot, given that LVMH will own the labels through Gabrielle Studio and therefore is subject to a substantial cut of future profits.
LVMH stock increased 4.87 percent in trading Monday on the Paris Bourse to close at $65.19. Donna Karan's stock increased 74 percent Monday to $8.50, up 3.63 on the New York Stock Exchange. Karan's firm went public at $24 a share, with great fanfare, in 1996, but her stock has taken a pounding since. A completed deal with Bernard Arnault's LVMH will effectively end the difficult, often strained relationship between Karan and Wall Street, where both parties felt either misunderstood or unappreciated.
"I feel like a mother who's giving off a child," said Karan. "I have every emotion I could imagine and more. I feel fear and excitement. I'm honored, overwhelmed and proud." said the designer, who was permitted to talk about the Gabrielle Studio deal, but advised by attorneys not to talk about the DKI proposal.
At a hastily called news conference in Paris, Myron Ullman, LMVH managing director, told reporters at the Royal Monceau, a hotel across the street from LVMH headquarters on the Avenue Hoche in Paris, "This strategic acquisition is quite meaningful for the [LVMH] fashion group."
"Donna Karan is a leading U.S. brand and recognized around the world. The house is clearly a fashion leader and the acquisition will be an excellent fit in the [LVMH] fashion group."
Ullman also trumpeted the deal as providing LVMH with an important foothold to expand into the American fashion market. LVMH already holds one-third minority stakes in the fashion houses of Michael Kors and Marc Jacobs, who design for LVMH houses Celine and Louis Vuitton, respectively.
"Donna Karan's presence in the American market is very interesting for LVMH," said Ullman. "This is not our first acquisition in the U.S. fashion market, but it is definitely our most substantial."
Ullman said LVMH approached Karan with a deal to acquire the company a month ago. "We sought out Donna Karan based on it being a lifestyle brand with a lot of global potential and complementary to our core businesses," said Ullman. He said a deal was signed on Saturday.
Asked if LVMH was competing with other firms for Karan, Ullman replied: "This is a very competitive business; there is always competition."
Monday's announcement caught the investment and fashion worlds off guard. Indeed, only hours before the press conference began at around 3 p.m. Paris time, speculation was building that Giorgio Armani might be the acquisition target. As word spread around noon in Europe, it was enough to goose the stock of Armani-controlled Simint SpA, the company that produces the Armani Jeans collection. Shares in Simint shot up almost 4 percent to $4.36 (4.88 euros) at midday, before closing on the Milan bourse at $4.19 (4.69 euros).
At the press conference, Yves Carcelle, president of LVMH fashion division, who was joined by Ullman and the group's chief financial officer Patrick Houel, stressed that the Karan deal was by no means last minute. "The details were well thought out," he said. "But the news was of a very secretive nature because it is a publicly traded company." Carcelle began the conference with a brief film presentation about the Donna Karan Co., about which many of the French financial journalists in attendance were not readily familiar. When asked if the firm was a luxury brand, Carcelle responded in the affirmative. "Luxury is a brand that has innovation and creativity with perfect quality that also generates emotion," said Carcelle.
Carcelle outlined LVMH's early strategy for its new acquisition, including opening wholly owned Donna Karan shops around the world and developing Karan's top line as well as the accessories and shoe lines."The signature Donna Karan line is the equivalent of any LVMH fashion house collection," claimed Carcelle.
Meanwhile, Carcelle said an important area of development would be "reducing the firm's dependence vis-a-vis American department stores."
He was quick to point out, however, that LVMH had no immediate plans to pull the line from U.S. department stores. "Today an enormous weight [of the firm's sales] are from department stores, which is not as profitable as consolidated retail," said Carcelle.
Although LVMH emphasized the deal would provide LVMH with a substantial opening to the American market, Ullman also said that much of the brand's potential for development lays overseas. "Through my selective distribution experience, I can tell you that U.S. lifestyle brands are very popular around the world and hold great sales potential," he said.
"With Ms. Karan at the helm, the worldwide potential for the brand is incredible," added Carcelle.
According to Ullman, 70 percent of Karan's business is in the U.S., with 7 percent in Japan and 23 percent in the rest of the world.
Asked how LVMH felt about Karan's extensive network of licenses, which runs counter to the trend among luxury firms to directly controlling manufacturing and distribution, Ullman responded: "There is no one business system for LVMH. We are not against licenses. We evaluate them on a case by case basis."
Meanwhile, Ullman said it was too early to say whether LVMH will buy Donna Karan franchised stores. The firm currently runs 95 units, 80 of which are franchises.
Ironically, some early indications that the two companies were getting cozy occurred when LVMH chairman Bernard Arnault bought a small percentage of DKI--under 1 percent--when it went public in 1996. Then last month, eLuxury, the recently launched LVMH-affiliated luxury Web sites, opened a Donna Karan New York virtual boutique. It expected to carry a selection of Donna Karan New York Collection merchandise, beginning with resort Collection 2000 for both women and men.
Karan said that for six months she's been working with Carcelle in Paris, and the two of them easily bonded.
"He's a class act guy. I walked into his apartment and saw those buddhas there, and we discussed Louis Vuitton," said Karan, who said she felt right at home. She said her upcoming Collection campaign was shot in Vietnam, and "we were talking about Indochine."
"It's about Asia, Paris and New York, and LVMH bridges the gap for us," Karan said.
When asked why she wanted to sell the lucrative Gabrielle Studio in the first place, Karan quipped, "I didn't. My husband made me do it+.Seriously," she added, "in order for LVMH to make a proposal for the public company, we had to sell the studio." And she pointed out it wasn't about money, since she gets a healthy paycheck each quarter from Gabrielle Studio.
In fact, many shareholders and Wall Street analysts have complained about the Gabrielle Studio licensing agreement, which was set up when the firm went public in June 1996. Complaints have grown more bitter as Karan's stock has continued to severely underperform, in spite of signs the firm has been turning itself around.
As reported, in 1999, Karan and her husband received $25 million under the Gabrielle Studio licensing agreement last year. That compares with payments under the licensing agreement of $19.5 million in 1998 and $17.6 million in 1997.
Historically, the Gabrielle agreement had provided for annual royalties of 1.75 percent of the first $250 million in sales, plus 2.5 percent of the next $500 million, 3 percent of the next $750 million and 3.5 percent of all sales over $1.5 billion. These sales include amounts derived from licensees.
The sale of Gabrielle Studio is dependent upon the expiration of the applicable Hart-Scott-Rodino waiting period and certain other customary conditions. The merger proposal is subject to due diligence, and a special committee of its board of directors is expected to review the terms of the merger promptly.
Describing what led up to the deal, Karan said she initially went in "skeptically."
"I put my pros down and the cons down, and I looked at what he's [Bernard Arnault] allowed John Galliano to do. Here is a man who appreciates art. He truly appreciates individuality. To put Marc Jacobs atLVMH and Narciso Rodriguez at Loewe....What's most obvious is he's allowed each of these designers to have their own individual style," said Karan.
Another attractive selling point was that Karan--a veteran of the now famous Franco-American fashion blowout in Versailles in 1973--would be the first American fashion house to be completely anointed by the French luxury goods firm. And, Karan said the company can live on and flourish beyond herself, although she has every intention of staying on as creative director.
Karan said she pursued this deal "in order to be able to realize the dreams upon which this company was founded. Stephan [Weiss] was extraordinarily involved in this. He's always had a vision for the company. My husband is a brilliant businessman. He really had a vision when we started the company in 1985. It was not about clothing. It was about lifestyle and accessories."
Most importantly, Karan said she wants to team up with LVMH to grow the business. "It's expensive to compete and have stores, and you need to be able to deliver the accessories and be able to manufacture and compete and open retail stores all over the world."
Karan said the business has changed so dramatically the past five years, it's imperative to have a global company behind any significant designer business. "Even though the intention has always been to be international, the ante is different. The dream is to be able to speak worldwide, woman to woman," said Karan.
Karan's strength has always been her ability to understand what women want and to talk directly to the consumer. She said when she began her own company in 1985, she wanted to do things differently than had been done before. Karan stressed that the company was not about only clothing. "Stephan's original vision was to bring in beauty and creative services, and we were the first people to be online with our fragrance." In addition, she noted that DKNY was conceived as an international brand, and not a diffusion brand. And, she was the first American designer to show her men's wear in Milan.
She said there are so many restrictions to being a public company in this day and age. And LVMH's ability to get retail space, its manufacturing capabilities and its collective clout will allow the company "to achieve its dreams."
Karan said if she didn't design clothes, she doesn't know what she'd wear. "I can't wear Gucci, or Prada, or Calvin or Ralph. There must be something about the Donna Karan Co. and the consumer. It feels different."
She said that when she talks about yoga and urban zen, it reaches many people's consciousness. And now that LVMH has purchased Gabrielle Studio, Inc., they'll foot the bill for her Collection Urban Zen store, which was slated to open next spring but has run into construction delays, and is planning a later opening.
While Karan's company hasn't had an easy time being public, the designer attributes that to the vagaries of fashion. "The fashion industry is not by quarter. To this day, I don't think I've deviated from day one, what I'd like the company to be. Sometimes to accomplish those goals, you don't fit into a quarterly plan."
Karan and her husband own 5.2 million shares in Donna Karan International, or $44.2 million at Arnault's offer of $8.50 a share. Karan said that only recently did she inform company shareholders about her intention to sell Gabrielle Studio to LVMH.
Reached for comment, a spokesman for board member Frank Mori, said, "Respectfully, Mr. Mori and Takihyo have no comment at this time on this matter."
Following Karan and Weiss, the holdings of DKI board members vary greatly. Frank Mori owns 4,059,448 shares, valued at Monday's closing at $34.5 million; Idol owns 448,783, worth $3.8 million; John Eyler owns 13,500, worth $114,750; M. William Benedetto owns 12,500, worth $106,250 and Ann McLaughlin, 12,000, worth $102,000. Lee Goldenberg, corporate executive vice president of worldwide operations, owns 49,187 shares, worth $418,089; Joseph B. Parsons, corporate executive vice president, chief financial and administration officer, owns 59,646 shares, worth $506,991; and Lynn Usdan, corporate senior vice president, general counsel and secretary, owns 10,949 shares, worth $93,066.
While LVMH, and other European luxury groups, long gave the impression they were disinterested in American designers, Arnault changed all that a few years ago when he hired Marc Jacobs, Michael Kors and Narciso Rodriguez. And yet, none of the Europeans stepped forth as interested bidders last year when Calvin Klein and Barry Schwartz put Calvin Klein Inc. on the market.
In one of his only public remarks about LVMH's interest level in Klein, Arnault said last December: "I think it's a wonderful brand, but we have not looked at it enough in detail at this time. I can't say anything else."
More recently, Arnault appeared cool to the big American houses.
In his new French language book "The Creative Passion," based on an interview with a financial journalist, Arnault was asked for his views on Klein and Ralph Lauren. "The brands created in the United States are certainly strong," he responded."But they don't have the mythical dimensions of Dior or Vuitton. Christian Dior and Louis Vuitton have a history that the American brands don't. They make people dream, much more than a brand oriented to sportswear."
And how does Karan describe her own myth? "It's a unique woman's understanding of the body; sensuality; touch and feel and comfort, and adding the artisan with the commercial. It's the personal soul that goes beyond that product."

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