PRADA NOW SAID TO BE GUCCI’S TOP INVESTOR, HIKING STAKE TO 9.5%
Byline: Samantha Conti
MILAN — In another stunning move, Prada has raised its stake in Gucci to 9.5 percent, becoming what analysts say is by far the largest shareholder in the Florence-based luxury goods house.
The announcement Tuesday came just 10 days after Prada managing director Patrizio Bertelli shook the fashion and financial sectors with the news that he had taken a 5 percent stake in the rival house.
Prada released a statement shortly after filing the required 13-D form to the Securities and Exchange Commission. In the SEC filing, Bertelli said he bought $260 million worth of shares as a “strategic investment, taking into consideration financial opportunities as well as possible developments in the sector with particular reference to [Gucci].”
Most importantly, even while downplaying the possibility of a takeover, Bertelli left all his options open in the filing, saying he may, depending on market conditions, “consider and explore…a variety of alternatives with respect to [Gucci], including…an extraordinary corporate transaction, such as a merger, re-organization or liquidation of the company” as well as joint ventures or “any other material change in [Gucci’s] business or corporate structure.”
Bertelli added that he “may explore the possibility of acting with one or more persons in connection with the foregoing matters.” But, the filing adds, except for listing such potential moves, there are “no plans or proposals” with respect to any of these matters.
Bertelli told WWD last week that he wasn’t interested in making a bid for Gucci.
“I’m not crazy about ownership. But I love gambling, mapping strategies and doing good business,” he said then. “I’m not like a lot of people in the fashion sector whose mentality is ‘mors tua, vita mea,’ if you lose, I win. I believe in a less cut-throat, less hysterical way of doing business. If the sector as a whole is successful, then everyone is successful.”
The 13-D form, required of all investors who take a 5 percent stake or more in a public company, said Bertelli stockpiled his shares between Nov. 15, 1997 and this past Monday. A large chunk of the 5.6 million shares in the Prada holding was acquired June 11 — 2.25 million shares at a price of $51.25 each.
Bertelli declined to comment on Tuesday.
Gucci chief executive officer Domenico De Sole issued a statement that said: “As previously announced, Gucci has not had discussions with Prada and we have no information other than what appears in Prada’s public statements and filings.”
Gucci would not comment, however, on whether Prada was or was not the largest shareholder. Before Prada’s latest disclosures, Gucci said its largest investors were mutual and investment funds, including Capital and Templeton. Their individual holdings are believed to be less than 9.5 percent. Gucci management has stock options that total 4.9 percent.
Industry sources close to Gucci said the company’s management was stunned when they heard the news Tuesday morning.
On June 6, when Bertelli made his first announcement, Gucci issued a statement saying it had not solicited the purchase, that no agreement had been entered into with the Prada Group, and that “no further discussions are contemplated.”
Carlo Pambianco, a luxury goods consultant here whose clients include top European and American names, said he sees Prada’s move as a further step towards controlling Gucci.
“I don’t think Bertelli is in any hurry. His project is for the medium-long term,” Pambianco said. “I don’t see this as a hostile attempt to take over the company, but rather his determination to see the two companies work together and cooperate on business strategies.”
Last week Bertelli told WWD he’s not planning to launch a bid for Gucci, but he would like to see the two companies cooperate in such areas as distribution, real estate and contracts with duty-free outlets and other retailers — much like France’s luxury goods companies.
But he also said then that Prada had “no immediate plans” to increase its stake in Gucci.
“A 5 percent investment is realistic for us now, but we may reevaluate that in the future,” he said.
Claire Kent, a luxury goods analyst at Morgan Stanley in London, said while she was surprised at the news, she is sticking with her view that Prada cannot afford to take over Gucci. “This is either an opportunistic financial investment or a case of Prada working with other investors,” Kent said.
At market prices, Gucci would cost $3 billion, up to 50 times Prada’s equity, which analysts have calculated to be between $60 million and $167 million.
“Even 51 percent of Gucci would be too much for them to handle,” said one Paris-based analyst. “To put it plainly, Prada’s net financial situation is tight.”
Privately held Prada, in a prospectus for a bond issue this year, reported 1997 equity of $163.4 million and debt of $129 million, with a debt/equity ratio of 79 percent — compared with Gucci’s absence of debt. The prospectus noted that the figures were unaudited.
Analysts see Prada as highly leveraged with unusually large debts for the luxury goods sector where many companies post a cash surplus at year’s end. Prada’s debt more than quadrupled in 1997 due mainly to store openings and expansions. That said, the company is growing feverishly. Sales are expected to reach about $830 million this year and grow to $1.06 billion by 2000, when they are expected to level off.
Analysts also point out that Prada has few financial resources for a merger or a takeover. As a private company, it can’t swap or offer Gucci holders a Prada stake.
Last week, Bertelli emphasized that Prada’s recent bond issue, which brought $137.2 million into the company’s coffers, was not meant to raise money for the Gucci stake. The bond money will go toward new stores, factories and an expanded Prada headquarters in Milan.
Few industry observers believe, however, that Bertelli is acting alone.
“There is surely more than one operator behind this deal,” said Pambianco. “Whether it’s a private investor, investment fund, or merchant bank, it is clear Bertelli is not acting alone.”
Bertelli said in the SEC statement that his money came from a mix of personal funds and bank loans: $25.7 million of his own working capital; a $42.9 million loan from Prudential-Bache International Bank Ltd; a $108.2 million loan from Italy’s Banca Commerciale Italiana; $68.6 million borrowed from IPI Spa, a Prada affiliate, and a $15.7 million loan from Prafin BV, a company owned by the Prada family.
Many European luxury goods analysts admitted they were baffled by Bertelli’s latest move.
“We’re all busy trying to figure out what is going on,” said a London-based analyst. “Prada is a highly leveraged company and Asia, where Prada does 36 percent of its sales, is collapsing. This is not exactly the moment for a hostile bid — and although Gucci is a healthy company it is a huge responsibility.”
Both Prada and Gucci, which derives some 44 percent of its revenue from the region, are feeling the Asian squeeze. Gucci stock plummeted last fall as a result of the financial storms. Since November, it has been recovering steadily, but is still nowhere near the high it reached last June of $72.625. On Tuesday, Gucci closed at 52 3/4, up 1 1/8 on the New York Stock Exchange.
Analysts say that if the increasingly feeble yen, now about 146 to the dollar, falls to 160 by the end of the year, it will spell trouble for luxury goods companies with big businesses in Asia.
Prada slashed its prices 10 to 15 percent in the region this year and bought out its local partners in those countries hardest hit by the crisis. In Korea, Prada took over the partnership it had with Joyce Boutiques Holdings to distribute the line. In Australia, it did the same with Club 21.
Gucci too, has adopted a similar strategy of buying out its partners in the region so as to tighten its grip on distribution and control its image in the financially shaky region. It bought back its business from its Korean franchisee and purchased a majority stake in its Taiwan store franchisee.
Last November, Gucci’s shareholders defeated a proposal by the Gucci management 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 stake.
In the meantime, in what many analysts say is a clear bid to gain a stronger hold over the company, Gucci launched a share-buyback plan.