Byline: Samantha Conti

MILAN — “It was the right time to buy,” Patrizio Bertelli, Prada’s managing director, said Monday, commenting on his company’s surprise acquisition of a 5 percent stake in Gucci.
As reported, Prada bought more than 3 million Gucci shares. Bertelli confirmed the price was about $120 million.
He said he liked the idea of working with his rival on certain strategies in an increasingly competitive marketplace, and hopes this will inspire alliances among other luxury goods houses.
“I’m not like a lot of people in the fashion sector whose mentality is ‘mors tua, vita mea — if you lose, I win,”‘ Bertelli told WWD in a telephone interview.
“I believe in a less cutthroat, less hysterical way of doing business. If the sector as a whole is successful, then everyone is successful.”
He said he’s not planning to launch a bid for Gucci. “I’m not crazy about ownership. But I love gambling, mapping strategies and doing good business,” he said.
On Monday, investors gave a thumbs-up to Prada’s announcement this weekend that it had acquired the stake in Gucci. Gucci’s stock closed at 50, up 2 7/16, on the New York Stock Exchange.
“Our belief is that Gucci has no intention of cooperating with Prada,” said Michelle Tsang, an equities analyst for Credit Suisse First Boston.
Gucci’s press release this weekend clearly stated that “no discussions are contemplated” with Prada. Underscoring that point, Domenico De Sole, chairman and chief executive officer of Gucci, stressed Sunday in an interview that Prada’s purchase was unsolicited. On Monday, he declined to comment further on Bertelli’s remarks.
In Bertelli’s view, however, Gucci would be an ideal partner for Prada: The two could cooperate in such areas as distribution, real estate and contracts with duty-free outlets and other retailers. Design and image, Bertelli said, obviously would be kept separate. “Chanel, Louis Vuitton and Hermes all work together to secure prime real estate for their stores outside France. Instead of fighting over locations and driving prices up, they cooperate and keep prices stable. It’s an intelligent way to do business,” he said. “I’m not just talking about Prada and Gucci. There could be a number of agreements between luxury goods houses in Europe: Chanel and Versace, for example, or Giorgio Armani and Jil Sander.”
Despite his statement that Prada did not want to acquire Gucci, Prada reportedly has been on the hunt for acquisitions in the past. Late last year, rumors circulated that Prada was in talks with Jil Sander, a much smaller company than Gucci. However, those talks reportedly came to nothing.
And Bertelli has been openly mulling the idea of cooperating with competitors for some time. Last December he told WWD companies should band together to exploit one another’s strengths.
Bertelli appears to have had a change of heart about Gucci. Last December, the explosive Bertelli lashed out at Gucci in these pages, saying the company had blatantly copied his wife Miuccia Prada’s designs in the past. Gucci brushed off the comments. Bertelli said he was still considering what role he plans to play as a shareholder — and how he would enlist Gucci’s cooperation. By all appearances, Gucci seems to be an unwilling partner, at least for now.
Bertelli said he began stockpiling Gucci shares in the second half of last year when the price began to slip.
“This is a healthy, successful company, and the stock is undervalued,” Bertelli said.
Gucci stock plummeted last fall as a result of the financial storms in Asia, where the company derives some 44 percent of its revenue. The stock fell as low as 28 3/4. Since November, it has been recovering steadily, but is still nowhere near its 52-week high of 73 7/8. The firm’s price/earnings ratio is half that of other premium-brand firms.
Bertelli stressed that Prada’s recent bond issue, which brought in $137.2 million, was not undertaken to raise money for the Gucci stake. The bond money will go to new stores, factories and an expanded Prada headquarters in Milan. The funding for the Gucci stake, he said, came from Prada’s own cash flow.
According to Bertelli, Prada’s cash flow in 1997 was $124 million and this year it’s expected to reach $142 million. Pretax profit is expected to rise from $130.1 million in 1997 to $154.5 million. Sales are expected to shoot from $674 million to $824 million. Gucci last year posted net income of $175.5 million on sales of $975.3 million. Analysts are expecting a 13.2 percent rise in revenue this year to $1.1 billion. Gucci’s first-quarter results are due out later this week.
Bertelli denied he had any ulterior motives in purchasing part of Gucci. “I don’t act out of spite, and I am perfectly aware that a 5 percent stake will not give me much say in how Gucci is run. All I can say is that it is now in my interest for Gucci to do well.”
Francesco Trapani, managing director of Bulgari, the luxury jeweler quoted on Milan’s stock exchange, said Prada would be foolish to think it could influence Gucci’s shareholders.
“I think Prada’s move is strange, because Prada and Gucci are competitors,” Trapani said. “If Prada has anything more in mind than a simple financial investment, then it’s going to have to put a lot more money on the table. It will have to increase its investment by at least five or six times if it wants to have any influence over Gucci’s shareholders.”
Analysts agreed. “We think it’s unlikely that, with a 5 percent stake, Prada could edge its way onto Gucci’s board and influence shareholders. Plus, it’s in Prada’s interest to insure that Gucci runs smoothly,” said Tsang of Credit Suisse First Boston.
Bertelli said Prada has 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.
Analysts concurred that Prada won’t be shopping for shares anytime soon. “Prada has a lot of issues to deal with — namely, its business in Asia — and we cannot envision them making a bigger investment,” added Tsang. “We think Prada took the stake for pure financial reasons.”
Earlier this year Prada slashed its prices 10 to 15 percent in Asia 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 has adopted a similar strategy of buying out its partners to tighten its grip on distribution and control its image in the financially shaky region. Earlier this year it bought back its business from its Korean franchisee and purchased a majority stake in its Taiwan store franchisee.
Michael Pacitti, an analyst at Santander SpA, a Spanish bank here, agreed that Prada would sit on its new shares. “Just look at the size of Prada compared to Gucci. Anything more ambitious than this stake is highly unlikely,” Pacitti said.
However, he added that while Prada may not be a threat, its investment may encourage other, larger companies to take a closer look at Gucci.
“If Prada sees value and potential for recovery, that may tempt other more powerful companies to take larger stakes,” Pacitti said. “Gucci has more to fear from that possibility than from Prada.”

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