Byline: Samantha Conti / With contributions from Miles Socha, Paris

AMSTERDAM – It’s still not over.
After two years of heated courtroom battles, LVMH Moet Hennessy Louis Vuitton has finally convinced judges in Amsterdam to order a probe into Gucci Group’s strategic alliance with Pinault Printemps Redoute. Depending on what the three court-appointed investigators find, the partnership that has been the platform for Gucci’s luxury acquisitions drive, could be dissolved.
On Thursday, the Enterprise Chamber of Amsterdam’s Court of Appeals ordered an investigation into Gucci’s management practices during the five months between January and May 1999 — during which time Gucci fended off LVMH’s hostile advances by naming PPR its white knight. In March 1999 Gucci handed PPR a 40 percent stake in the company — via a new share issue — and received about $3 billion in return, cash earmarked for luxury acquisitions.
PPR has since bought a further 2 percent of Gucci, and is by far the group’s largest shareholder.
Meanwhile, an energized James Lieber, LVMH’s director of corporate affairs, said Thursday the court’s decision was “exactly and everything we have been asking for the past two years. We want the court to investigate the propriety of the PPR transaction and the transfer of control to PPR — without a full bid or control premium for shareholders. We believe [today’s decision] signals a step toward the cancellation of the PPR transaction.”
LVMH has said it would like to see PPR launch a full bid for Gucci, or see the partnership canceled altogether. It was the custom-made share issue for PPR that diluted LVMH’s 34 percent stake to its current 20.6 percent.
A Gucci spokesman said he was not surprised with the court’s decision, and that the company “wants to evaluate whether to appeal.” Both Gucci and PPR said in separate statements that they would cooperate fully with the three investigators, and were confident of a favorable outcome. The court also ordered Gucci to fund the investigation — to the tune of about $100,000.
The Gucci spokesman added: “Independently of whether we decide to appeal, we want the probe to go ahead and we will try to make the investigators’ lives as easy as possible.”
The investigators are J.S. Rijkels, a former legal and tax adviser who has already conducted probes on behalf of the court; A.G. Jacobs, a former chairman of the Belgian financial company ING Groep NV; and H.J.M.N. Honee, a former legal adviser for Unilever and a professor of business law.
Thursday’s announcement contradicts the court’s previous decision — made in May, 1999 — to uphold the Gucci-PPR alliance and not to launch an investigation. Gucci and PPR greeted that initial decision with champagne-soaked celebrations — and big plans for constructing a world-class luxury group to rival that of LVMH.
But their halcyon days didn’t last long.
A year later, in June, the Dutch Supreme Court annulled the lower court’s decision at the recommendation of Amsterdam’s attorney general, Rob Mok. Mok believed that Gucci’s dealings with LVMH had not been “reasonable or fair.” In September, the Supreme Court ordered the lower court to reexamine the Gucci-PPR case, strongly suggesting that it conduct a formal investigation before drawing any conclusions.
The Gucci-PPR partnership pact was sealed in March 1999 and since then Gucci has built up a stable that includes Yves Saint Laurent, Sergio Rossi, Boucheron, Roger & Gallet, Bottega Veneta, BEDAT & Co and Alexander McQueen. The group is currently said to be in negotiations to set up fashion houses for designers Stella McCartney and Nicholas Ghesquiere (see sidebar).
The Enterprise Court’s Judge Huub Willems, who has been tracking the Gucci-PPR case since May 1999, told the courtroom on Thursday: “The court will investigate whether…Gucci acted in good faith with regard to its shareholders, one of which is LVMH. The PPR deal…and the Employee Stock Ownership Plan+are justified grounds to doubt good management at Gucci.”
Willems, dressed in the traditional black toga and white pleated bib, spoke in Dutch to a handful of news reporters, defense attorneys and representatives from Gucci and LVMH. Fittingly, the mint green courtroom, with a bold, abstract tapestry hanging behind the bench, looked more like a fashion showroom than a tribunal.
A Gucci spokesman said the company was not taken aback by the latest decision.
“Following the Supreme Court’s decision to annul the previous verdict, an inquiry into the PPR transaction and the ESOP did not come as a surprise,” he said.
The ESOP, Gucci’s initial poison pill measure, would have allowed Gucci employees to counterbalance LVMH’s voting power within the company.
A spokesman for PPR characterized Thursday’s decision as a “logical consequence” of the Supreme Court’s decision last September.
“We are not embarrassed at all because all the issues have already been examined, and we are confident because all the questions have been raised with very precise responses,” he said.
Luxury analysts downplayed the significance of Thursday’s decision, saying it would have a nominal effect on the stock of either company.
Shares in Gucci closed down $1.85, or 2 percent, to close at $88.15 on the New York Stock Exchange. Shares of LVMH closed up 1.4 percent to $59.61 on the Paris Bourse, while PPR went down 2.5 percent to $197.16. (LVMH and PPR figures are converted from French francs at current exchange rates.)
“We have very poor visibility on the outcome of this case, and that has not changed from yesterday,” said one analyst, who spoke on condition of anonymity. “It’s kind of business as usual.”
Christian Chardin, fund manager at Deutsche Asset Management in Paris, said he did not expect the fact of the inquiry to have a significant impact on the market. He noted that the “grand public” would not weigh such matters when they decide to buy a handbag or a pair of shoes. “All depends on the decision of the investigators,” he stressed. Chardin also expressed doubts about how a cancellation of the transaction could occur two years after the fact.
In January, however, during a hearing before the Enterprise Chamber, lawyers for Gucci said an investigation “would cause enormous damage to Gucci’s image, an image which has been carefully constructed.” The lawyers said LVMH was out to “harass, hinder and discredit” its chief competitor via the legal system. In fact, they warned that confidential information could be disclosed during an inquiry, giving its main competitor a commercial advantage.
A Gucci spokesman declined to comment on the potential impact of the investigation on Gucci’s image.
Gucci said in a statement it was confident about the outcome of the investigation. “In reexamining the record of events, [we believe] the court investigators will arrive at the same decision that the court reached in 1999, and uphold Gucci’s alliance with PPR.”
And PPR said it believed the “strategic alliance with Gucci has been formed in full compliance with Dutch law.”
The whole process is expected to take up to six months with investigators focusing on the paperwork surrounding the ESOP and PPR transactions. A source close to Gucci has said De Sole kept scrupulous records of every move he made during the five-month period. “He has a virtual time capsule with everything you’d want to know about the takeover,” the source said.
The Enterprise Chamber stressed that it would only look at the period between January and May, and would not look specifically into allegations by LVMH that Gucci Group chairman and chief executive Domenico De Sole and creative director Tom Ford were issued a generous pack of stock options in exchange for their support of the PPR deal.
“LVMH failed to prove that the options given to De Sole and Ford+have anything to do with the PPR transaction or the agreement that was made between the two parties on or before May 27, 1999,” Willems said. He added, however, that if investigators do find a link between the stock options and the PPR deal, they will take a closer look at the options.
In a statement, LVMH reiterated that in the event that the Gucci-PPR partnership is dissolved, the French luxury goods company would “ensure that top-tier international banks arrange a new $3 billion share issue by Gucci, which would enable Gucci to continue to execute its strategy. In order to guarantee Gucci’s independence — [the share issue] would be open to all Gucci shareholders.”
An LVMH spokeswoman who attended the proceedings Thursday morning said this latest decision was a significant one for the Enterprise Chamber.
“Until now, the court has never ordered an investigation like this, other than in cases of bankruptcy,” she said.
Most of the cases handled by the Enterprise Court of Appeals have to do with failed businesses and battling business partners.
Speaking of the battle front, the Enterprise Chamber isn’t the only venue where Gucci, PPR and LVMH are waging war. LVMH has lawsuits pending in the Amsterdam district court, where it is prepared to sue for monetary damages it believes it has suffered at the hands of Gucci.
For its part, Gucci has filed complaints with the European Union’s anti-trust authorities against LVMH on grounds that its shareholder and archrival is violating Europe’s competition law. That complaint is similar to the one Gucci filed to the Amsterdam District Court last October, asking LVMH to sell its 20.6 percent stake in the company and arguing that LVMH was abusing its position as a Gucci shareholder and frustrating its acquisition strategy.
Late last year, both companies sued one another for criminal defamation because of statements each made regarding the stock option packages issued to De Sole and Ford.
Adding to the bad blood between LVMH and Gucci was an aborted compromise that would have allowed LVMH to sell its shares and exit Gucci.
What happened was this: LVMH, Gucci and PPR had hammered out a two-part deal by which all Gucci shareholders were to be given two chances to sell their shares to PPR. The first opportunity, tailor-made for LVMH, was a $100-a-share tender offer that would have taken place immediately. The second offer, that was to take place between 18 months and four years down the road, would have PPR launch a premium offer to Gucci shareholders in order to take full control of the company.
But LVMH pulled out of the agreement when it learned that Gucci’s supervisory board was not ready to recommend the $100 offer, believing the price was too low. At Gucci’s annual shareholders’ meeting a few days later, the three groups clashed openly.
“Our request was that the board recommend the first offer,” argued an LVMH official at the meeting. Asked what it would take to jumpstart the talks, PPR chief executive Serge Weinberg replied: “We are not ready to discuss this offer again.”