IT’S ARNAULT TIME AGAIN AS LVMH LAUNCHES BID FOR TAG HEUER WATCHES

PARIS — Bernard Arnault is back from vacation.
Most French executives are still shaking the sand out of their Lobb shoes, but the chairman of LVMH Moet Hennessy Louis Vuitton managed to tie up two deals in two days. His Paris-based luxury goods firm announced Monday that it launched a friendly, $747 million takeover bid for Swiss watch firm Tag Heuer, and is expected to reveal today that it will take a majority stake in Benefit, a niche beauty brand.
LVMH closed down 1.4 percent to $272.16 on the Paris Bourse Monday.
All dollar figures are converted from the French franc at current exchange.
Fashion’s latest wave of merger fever has rumbled through Italy in the last week, as Prada bought Jil Sander and made a bid for Church & Co., the British shoe company. Fendi could be the next to go, since it’s widely reported the family-owned firm is for sale, with both Gucci and Prada as possible buyers.
But the focus shifted back to France on Monday.
Benefit, a quirky young San Francisco-based company, will be the third small American beauty brand that LVMH has snapped up since March. Last spring it acquired Bliss, the spa and beauty business started by Canadian entrepreneur Marcia Kilgore. Then a few months ago it picked up the struggling Los Angeles-based cosmetics company Hard Candy. Terms of the deal could not be learned. An LVMH/Benefit deal would confirm a July 23 report in WWD that the two were talking.
At the same time, LVMH made its bid for Tag Heuer. “Thanks to associating the strengths of both our groups, we will build an important pole of development in the watch industry,” said Arnault, chairman of LVMH, in a statement Monday.
The transaction follows up on the promise Arnault made at the LVMH analysts’ meeting in March to build a significant watch business via its Fred watch and jewelry subsidiary. Earlier this year, the Benedom company, which makes watches for Arnault-owned Christian Dior and Celine, was transferred to Fred from Dior. An LVMH spokesman said Tag would become part of the Fred-Benedom watch group, under the general management of Fabrice Larue.
According to terms of the deal, LVMH will pay $138.70 a share for a minimum stake of 50.1 percent in Tag Heuer. This represents a premium of 74.1 percent over the average closing price of $79.67 realized during the 12 months preceding Sept. 10, the last trading day for Tag before the deal was announced. But one industry analyst said he would not be surprised if a competitor such as Swatch or Richemont sweetened the deal with a counteroffer.
Tag board members and a group of shareholders made up of management, the Tag Finances holding company and private individuals with a combined stake of 38.8 percent, have promised to trade in their shares for the deal. The offer will be presented to outstanding shareholders before Oct. 5.
The Tag acquisition will give LVMH a crucial foothold in the sports and prestige watch business. Tag can profit from LVMH’s ability to manage and distribute brands, while the group’s financial strength can enlarge the Tag product range.
“The short-term goal is to build up products under the Tag Heuer brand and thus grow sales,” said an LVMH spokesman. “It’s too early to talk about if or how Tag could develop watches for LVMH brands.”
In a statement, LVMH said it “attached the utmost importance” to the competence and professional experience of the Tag management and staff, who would benefit from the newly formed group. It is unclear if Tag president Christian Viros will remain. Viros could not be reached for comment.
Tag Heuer, a 136-year-old company, has been publicly traded on the New York Stock Exchange since 1996. Turmoil in Asia soured sales last year and Tag’s share price hit a 52-week low of $48.38. Tag’s price improved this year, roughly doubling to $100 a share as of July 27, the day discussions opened between LVMH and Tag.
One analyst who asked not to be quoted said LVMH’s deal is well timed, although it is paying a high premium over Tag’s 12-month-average share price.
“The watch industry reacts later than the luxury sector as a whole, so we are expecting momentum in watches that we have already started to see in luxury goods,” the analyst explained.
Another analyst praised LVMH’s move into the watch business because it provides “high margins and good geographical distribution of customers relative to other luxury products.” For example, last year Tag generated 31 percent of its sales in Europe, 37 percent in the Americas and 32 percent in Asia, the analyst explained.
The name behind a strong watch brand can be extended to other businesses, observers said, such as eyewear.
LVMH is clearly eager for acquisitions and has the cash to do it. Last spring, LVMH sold 146 million shares in British beverage giant Diageo for $1.62 billion. Its existing 143 million shares in Diageo are worth about $1.4 billion based on Monday’s closing price, and they have a 20 percent stake in Gucci that is worth about $1.7 billion. LVMH’s net debt is about $1.5 billion, a healthy position, say analysts. On top of that, LVMH’s Louis Vuitton business provides high margins and plenty more cash to play around with.
The luxury watch market had a mixed reaction to the deal. Shares for Tag closed up 8.9 percent to $138.70. Shares for the Swatch group and Richemont closed flat at $740 and $1,891.61, respectively. Following last week’s reports that Tag was in discussions with potential partners, there was speculation that Richemont and Gucci had been in the bidding for the company, but this could not be confirmed.
With a relatively mature fine watch business in Europe and the Asian market still somewhat volatile, the U.S. has recently been the region experiencing the bulk of the growth in the sector. Watch retailers here have said the country still holds considerable potential, prompting such major watch retailers as Tourneau to continue on an expansion track.
The custom of wearing a fine watch or investing in a wardrobe of watches is a concept that, until the last decade or so, was still limited to the very wealthy. With a very healthy fashion watch business dominated by such brands as Timex and brands like Guess and Anne Klein, and a homegrown moderate-priced segment with players like Bulova, few Americans sought out high-end Swiss watches to the same extent as their European or Asian counterparts.
But with the rise of interest in and the cash to acquire more luxury items, AmericanS have educated themselves on the features of the big Swiss brands, and shown a hunger to buy.
Industry sources said that U.S. fine watch sales have risen steadily in each of the last four to five years, with some stores experiencing annual gains in the 20 to 30 percent range each year.
Even the summer, typically a slower period, has been unusually strong.
“We’ve had a phenomenal summer, and not just in New York, but across the country,” said Anthony J. D’Ambrosio, executive vice president of Tourneau.
Tag Heuer, until recently, had been a key player for consumers making their first fine watch purchase, with the strength of the line in the $600 to $800 range. In the last few years, however, the company had given up some of those price points in favor of focusing more on the $1,500-and-up range.
Watch industry members expressed surprise at the latest LVMH purchase.
“Historically, LVMH has been a strong player that usually leaves key management intact,” said Tourneau’s D’Ambrosio. “We have a long and close relationship with Tag, it’s one of our more important brands. We have done pretty well across the board with their recent launches like Kirium and Alter Ego, but we do well with the classics as well.”
Though Tag is one of the most powerful watch brands around the world, the brand’s business had been primarily focused on men’s.
It also has had a larger fashion connection than many other watch firms, through its three-year sponsorship of the men’s 7th on Sixth runway shows and the Gen-Art event, a forum for young talent.
When its first watch for women, Alter Ego, was launched this summer, the firm hired Peter Lindbergh to photograph the advertising campaign featuring a mix of five powerful female images. The five women were tennis player Monica Seles, sprinter Marion Jones, swimmer Franziska van Almsick and actresses Kristin Scott Thomas and Helena Bonham Carter. The campaign marked the first time Tag used nonathletes in its advertising.
The Benefit acquisition, meanwhile, gives LVMH’s beauty business another stake in the percolating U.S. boutique market. Patrick Choel, president of the fragrance and beauty division of LVMH, which owns Parfums Christian Dior, Parfum Givenchy, Kenzo Parfums and Guerlain, declined comment on the deal. However, he has said that one of LVMH’s missions is to increase both its presence in the U.S. and its appeal to a younger, hipper consumer.
It accomplished both with the Bliss and Hard Candy acquisitions. Part of Benefit’s appeal, sources say, is that it touches a more diverse audience by solving specific problems with cheekily named products like Lip Plump and Aruba in a Tuba self-tanning. Benefit was started by Jean Ford and Jane Ford, twin sisters, in 1996. It has freestanding stores in San Francisco and sources say it will do about $20 million in wholesale sales this year.
The line is sold in 100 U.S. doors, 20 U.K. doors and at the Sephora megastore on the Champs Elysees in Paris. It will be rolling out to 20 more Sephora stores in France as well as to Sephora in Japan.