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As Stock Rises, Will Gucci’s Shareholders Punt PPR’s Put?

If Gucci shares continue to rise as they did last week, it could keep Gucci a public firm and save it from becoming a wholly owned subsidiary of PPR.

MILAN — There could be another twist in the Gucci-PPR saga.

Gucci’s share price is on the rise after the Italian company last week issued a very bullish second-half forecast, saying it hasn’t seen such growth since Sept. 11, 2001. If Gucci’s shares continue to rise through March 2004, it could keep the Italian luxury goods group as a publicly listed company and prevent it from becoming a wholly owned subsidiary of Pinault-Printemps-Redoute.

On Friday, Gucci shares closed 1.8 percent higher at 74 euros, or $85.80 at current exchange, after rallying as high as 75.75 euros, or $87.83, in early trading on the Amsterdam Stock Exchange. Volume was well above average. Over a million shares, or about 1 percent of the company, changed hands. On the New York Stock Exchange, where more than 500,000 shares were traded, shares closed up 50 cents, or 0.6 percent, at $85.95 after trading as high as $86.32 during the session.

This compares with the PPR put of $85.52 per Gucci share.

If Gucci remains a publicly listed company, at least two men would be very pleased: Gucci president and chief executive Domenico De Sole and its creative director, Tom Ford, both of whom are requesting autonomy from PPR. As reported, both men are negotiating the terms of their contracts, which expire next year, and De Sole said last week that he hoped a conclusion would be reached by the end of this month.

In an interview with WWD in March, De Sole said he was going to do everything in his power over the next 12 months to ensure that the PPR put didn’t happen.

“PPR must honor their promise, and they will,” De Sole said at the time. “But from day one, everybody — PPR included — agreed we should try to avoid the put on the shares. At the time the deal was made — before Sept. 11 — everyone felt the stock would be way, way above the put price.”

And De Sole added: “Our hope is still to avoid the put. Our wish is that Gucci remains a public company.”

While it is still early in the Gucci share price resurgence — and shareholders by their nature can be a fickle bunch — this is the first time in more than a year that De Sole’s wish doesn’t look farfetched. The spike in Gucci’s share price follows a flurry of analyst reports Thursday that predicted minority shareholders might keep their Gucci shares instead of tendering them to PPR in March, when it must offer $85.52 for each share it does not own. If holders snub the offer, such a move would keep Gucci shares listed and result in a multibillion-dollar savings for PPR. PPR currently holds 67.6 percent of Gucci and it has said it plans to increase its stake to 70 percent by the end of the year.

So far, PPR has paid $4.27 billion for its two-thirds stake in Gucci and is committed to buying the final 30 percent of the firm it won’t own at year’s end for about $2.8 billion. Subtracting the $1.04 billion received from Gucci when it made its special 13.5 euro capital return to shareholders, Gucci would wind up costing PPR just over $6 billion.

Until now, the general belief has been that nearly all minority shareholders will tender their shares, since the put represented a premium over Gucci’s recent share price. But over the past few days, analysts have started to ponder whether some combination of a weak dollar-euro exchange rate, strong financial results from Gucci in the second half and renewed contracts for De Sole and Ford could lift Gucci’s share price enough that the PPR offer is less tempting to the other shareholders.

Two things are clear, though, no matter how many shareholders tender to the French group: PPR will still own 70 percent of Gucci’s shares and, under the terms of the deal struck between PPR and Gucci, the French company still will gain control of Gucci’s supervisory board next year.

If at the end of the offer, 15 percent or more of Gucci shares are still not in PPR’s hands, the French company has said it will aim to keep Gucci a public company. PPR will “use its best efforts to cause Gucci to maintain the listing of…shares on the [New York Stock Exchange] and Amsterdam Stock Exchange,” according to the terms of the deal between the two companies.

While some analysts continue to believe that Gucci shareholders will still accept PPR’s offer, Deutsche Bank took a more strident stance Thursday. It upgraded both Gucci and PPR to “buy” from “hold” and it said that Gucci shares are worth 95 euros, or $110.55. The PPR offer undervalues Gucci shares, according to the bank.

“We no longer expect minority shareholders to tender their shares to PPR next March,” the bank’s analyst team said in its report.

Claire Kent, an analyst at Morgan Stanley, said in her research report Friday that the real question is Gucci’s intrinsic value and whether “Gucci management [can] regain credibility fast enough to remain a public company.”

“The put price PPR is offering minority shareholders in March 2004 greatly underestimates Gucci Group’s true value [assuming current management stays in place], in our opinion.”

Other observers expressed a more skeptical view.

“There is nothing structural to prevent the share price from going above the put price [of $85.52], but it would require an ongoing re-rating of the sector and Gucci would have to deliver very strong results,” J.P. Morgan analyst Sagra Maceira said in an interview Wednesday following the release of Gucci’s second-quarter numbers, adding that the likelihood of shareholders rebuffing the PPR offer was “not very high.”

One Paris-based analyst wrote she believes it is “unlikely that the PPR put option will be out of the money in March 2004,” noting that Gucci is still trading at close to a 40 percent premium to the sector.

The other major shareholder in Gucci apart from PPR is French bank Credit Lyonnais, with a share of about 11 percent. Credit Lyonnais acquired the stake from LVMH Moët Hennessy Louis Vuitton as part of the settlement agreement struck in 2001. That deal saw LVMH sell the Gucci stake that was left over from its takeover attempt in 1999.

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