RICHEMONT PULLS OFF A $1.86 BILLION SWISS WATCH TRIPLE PLAY

Byline: Miles Socha / With contributions from Wendy Hessen, New York / Samantha Conti, Milan

PARIS — After sitting on the sidelines while other watch brands were scooped up by more acquisition-minded firms, Compagnie Financiere Richemont AG emerged victorious Friday in the high-stakes bidding war over Mannesmann AG’s three Swiss luxury watch brands.
Edging out a cadre of high-profile bidders including LVMH Moet Hennessy Louis Vuitton, the Swatch Group and Gucci Group, Richemont said it had acquired Jaeger-LeCoultre, International Watch Co. and A. Lang & Sohne in a $1.86 billion transaction. The amount also reflects the $169 million Richemont paid the Audemars Piguet group to acquire its 40 percent stake of Jaeger-LeCoultre.
The acquisition, which is subject to approval by Mannesmann’s supervisory board and regulatory clearance, will leave Swiss-based Richemont with 100 percent of Jaeger-LeCoultre and IWC, and 90 percent of A. Lange & Sohne. The Lange family retains the remaining 10 percent.
Mannesmann, primarily a mobile-telephone company, had owned Les Manufactures Horlogeres, or LMH brands, since 1993 and decided to sell the business by auction following the February 2000 acquisition of Mannesmann by Vodaphone AirTouch plc.
Richemont characterized the acquisition as a major strategic step in fortifying its position in the high-end watch business, saying its worldwide distribution network would open up new opportunities for the LMH brands, especially in the U.S.
Indeed, the newly acquired brands will mesh nicely with Richemont’s existing portfolio of venerable fine watch and jewelry names under its Vendome Luxury Group, which includes Cartier, Vacheron Constantin, Piaget, Baume & Mercier and Officine Panerai. Richemont also owns high-end jeweler Van Cleef & Arpels.
Johann Rupert, Richemont’s media-shy chief executive officer, could not be reached for comment. However, in a statement he said the acquisition “represents an outstanding opportunity for us to redeploy assets into our luxury goods business.”
“We are also delighted that our cooperation with the Audemars Piguet group has enabled us to reestablish Jaeger-LeCoultre under a single owner,” Rupert said.
Last month, Richemont revealed a pact with Audemars Piguet in its bid for the Mannesmann subsidiaries.
Luxury analysts had deemed the Mannesmann transaction strategic for all the leading bidders, because of the manufacturing capabilities of the brands. Jaeger-LeCoultre produces its own components at factories in Switzerland that employ some 900 workers.
The Mannesmann brands were viewed as an important opportunity for LVMH, which has been rapidly expanding its stable of fine watch and jewelry brands. Last year, it took over Tag Heuer, bought the Swiss watch firms Breguet and Ebel and the French jewelry house Chaumet — instantly making it the third-largest purveyor of Swiss watches, behind Swatch and Richemont.
But observers had noted that LVMH does not boast any watch brand in the upper crust of the market, which tends to generate the juiciest operating margins, between 30 and 40 percent. In the first half of the year, LVMH’s new watch and jewelry division, which also includes the recently acquired Omas luxury writing-instruments firm, registered $256 million in sales.
An LVMH spokesman said Friday it was not “a strategic necessity” to buy the three brands. “We have a critical size. For us, the priority is organic growth.”
Gucci Group had no comment.
The auction played out against a fevered acquisitions climate, causing luxury groups to be wary of overpaying. Richemont’s purchase price is roughly nine times sales, which is considered a huge multiple.
Multiples in the luxury sector have hit the stratosphere since the battle for Gucci last year. Pinault Printemps Redoute eventually won out with an initial investment of 40 percent in Gucci for $2.9 billion, after Bernard Arnault ultimately — and unsuccessfully — offered up to eight times sales, or roughly $8.5 billion, for all of Gucci.
With PPR’s alliance, Gucci also got into the buying game, paying slightly over $1 billion, just over one times sales, for Yves Saint Laurent and its parent, Sanofi Beaute, last year. Meanwhile, Prada Group and LVMH, after a bidding war with Gucci, paid an estimated $545 million for 51 percent of Fendi, which works out to about four to five times sales.
In a research bulletin Friday, J.P. Morgan Securities called the purchase price “relatively expensive” but said Richemont would be able to “extract more value from this acquisition than the other potential bidders.”
“We are not surprised at all that Gucci did not end up with these brands, since we never expected Gucci’s management to pay up to these levels,” the report said. “We are more disappointed that LVMH did not win, as the company needs the LMH watches in order to get critical mass in its newly created prestige watch and jewelry division.
“We estimate that the highly profitable LMH brands would have helped the group offset the low profitability of the watch brands acquired so far, except for Tag Heuer, which has operating margins above 20 percent.”
According to Richemont, LMH sales have grown at a compound annual rate of 19 percent to $210.5 million last year, with operating profits amounting to $42.7 million. Net sales in the first half advanced 25 percent to $118.7 million.
In a recent interview with WWD, Rupert spoke of his reticence to join the luxury buying spree. He said a lot of economic instability might lie ahead, unseating luxury’s long smooth run.
“Do I really want to go out on a limb with a lot of acquisitions?” he asked rhetorically. “If a downturn happens, it won’t be a case of who buys what. It will be a case of survival.”
Still, the company has amassed cash by divesting assets outside the core luxury sphere. In June, Richemont received $663 million by selling 50 percent of its 35 percent stake in British American Tobacco. In September, the company expects to receive $1.14 billion from disposal of its interest in communications firm Vivendi.
Richemont has consistently stated it is not interested in the fashion end of luxury goods, preferring the less cyclical watch, jewelry and leather-goods sectors, despite its ownership of designer ready-to-wear firm Chloe. Richemont already gets about 47 percent of its annual sales from watches. The LMH brands are considered “classical” within the luxury watch segment.
This is Richemont’s second acquisition in the high-end watch sector this month. It also bought the watch-dial manufacturer Stern Group, a leading maker of luxury watch dials, for an undisclosed price.
Last month, Richemont and its associated companies reported a 15.9 percent increase in attributable profits to $749 million on a 26.1 percent rise in sales to $2.79 billion for the year ended March 31.
While concerned about power consolidating into one firm, U.S. retailers saw Richemont’s win as the best scenario. “We knew [the LMH brands] had to go to somebody, and our guess was that it would be Richemont, especially considering their alliance with Audemars Piguet,” said Anthony J. D’Ambrosio, executive vice president of the watch retailer Tourneau. “It was important to the industry to see where the balance of power would lie. Richemont’s win will keep the stakes more even than if the three brands had ended up elsewhere.
“There are so few manufacturing companies left of a quality nature. Richemont has the experience, knowledge and management staff and a history of properly handling the brands they own. They are also conscious of the need for proper distribution and have the ability to protect the concept of luxury.”
Like some in the fine jewelry and watch industry, D’Ambrosio credited the manufacturing expertise of Jaeger Le Coultre as a major attraction for Richemont.
“The Vendome brands are particularly vulnerable because of their dependence on other companies for movements,” he said. “This acquisition provides a comfort factor for them, particularly at the high end.”
John Green, president and ceo of Lux, Bond & Green, said that he believes most retail jewelers would have preferred that the brands had remained with Mannesmann, but “when compared to the other bidders, Richemont has done a good job with service and maintenance of their brands+and U.S. management has a proven track record.”
But he also expressed concern about the consolidation of power under one corporate entity.
“They are now such a formidable company,” said Green. “There is always the wariness that they will open their own retail stores. Hopefully, they will see the value in maintaining their relationships with independent jewelers.”
Mark Udell, president of New York-based London Jewelers, said, “There is a lot of concern that with so much power, retailers will be put under a lot of pressure,” Udell said. “The key here is to respect the partnership between the group and its retail partners.”

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