PRADA BUYS 5 PERCENT GUCCI STAKE
Byline: Samantha Conti
MILAN — In a gutsy move that rocked the fashion and financial community here, Prada has taken a 5 percent stake in Gucci, its archrival, becoming one of the Florentine company’s largest single stockholders.
Over the weekend, Prada issued a statement that said, “The investment was for financial reasons and signals a strategic diversification in the sectors in which Prada operates. It also testifies to a boundless admiration for the re-birth of one of Italy’s most significant brands.”
Gucci chairman and chief executive officer Domenico De Sole said he was surprised by the move. “I think it will be very positive for Gucci,” he said in a telephone interview Sunday. “My number-one goal is to maximize shareholders’ value. I welcome any new shareholder’s investment.”
De Sole said it would be “impossible” for Prada’s managing director, Patrizio Berttelli, to hold a seat on Gucci’s board of directors because of “an obvious conflict on interest.”
Gucci’s largest investors are mutual and investment funds, including Capital and Templeton. Gucci management has stock options for a total of 4.9 percent.
After Prada’s announcement, Gucci issued a statement that it had not solicited the investment, that no agreement had been entered into with Prada and that no discussions are contemplated.
Financial sources said Prada purchased a little more than 3 million shares in Gucci for a total of roughly $120 million. Since the crisis in Asia broke out last fall, Gucci’s stock has taken a beating: Its price/earnings ratio is half that of other premium-branded goods, analysts say. Gucci closed at 47 1/2, up 1/8, Friday on the New York Stock Exchange.
Despite the problems in Asia, however, Gucci reported a 4.2 percent rise in net income to $175.5 million, and revenues rose 10.8 percent to $975.4 million at the year ended Jan. 31.
A European financial analysts who follows Gucci was upbeat about Prada’s move: “Prada, a prestigious, highly successful company, is giving Gucci a vote of confidence; I think it’s probably the best news DeSole has heard in a long time. Prada is making the statement that Gucci is undervalued, that financial markets do not appreciate its true value. “
The analyst added that it was far too early to tell whether Prada’s intent is to take over Gucci entirely.
Prada’s Bertelli, who declined to comment on the buy, is spearheading an drive for acquisitions and has said he admires the way Bernard Arnault drew luxury goods companies under the LVMH umbrella, saying the same could be done in Italy.
Prada, which is expecting sales of about $833 million in 1998, this year issued five-year bonds for a total of $137.2 million. The money raised by the bonds, which were over-subscribed by 2 1/2 times, is slated for new stores, factories and a bigger Prada headquarters in Milan.
Carlo Pambianco, a luxury goods consultant here, said, “Of course, everything is at an embryonic stage, but the objectives are clear. Bertelli wants Prada and Gucci to work together within the context of a group. I see the move as positive for both companies.”
Pambianco continued: “With 5 percent of the stake, Bertelli can begin to galvanize Gucci shareholders and nudge Gucci towards working with Prada. The synergies could be on a variety of levels: production; acquisition and study of new materials; distribution, and a stronger presence with regard to the media.”
But another source had a different take: “I see this move as a potential threat to De Sole and to Gucci. Two things could happen. The first is that Bertelli is speculating on Gucci shares — he’s thinking that maybe Gucci will perceive him as enough of a threat to buy his shares back at a premium price.
“Second is that Bertelli wants to have a say in how Gucci is run by gaining influence over fellow Gucci shareholders. This could be a very embarrassing situation for De Sole.”
Last November, Gucci shareholders defeated a Gucci management proposal to introduce an anti-hostile takeover measure. The rule would have limited the voting power of a single shareholder to 20 percent, regardless of that shareholder’s state.