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High Marks to Arnault on Guerlain Purchase

PARIS -- LVMH's acquisition last week of the majority of Guerlain has earned a thumbs-up from the beauty and luxury goods industries here.

Some are even calling it Bernard Arnault's smartest move since securing control of LVMH three years...

PARIS — LVMH’s acquisition last week of the majority of Guerlain has earned a thumbs-up from the beauty and luxury goods industries here.

Some are even calling it Bernard Arnault’s smartest move since securing control of LVMH three years ago.

In Guerlain, the LVMH chairman has bought a well-run company with a prestigious name and a slew of exclusive products, observers point out. And, according to analysts, the deal was done for a reasonable price.

Under the terms of the deal, unveiled April 29, the Guerlain family will receive the equivalent of $343.5 million worth of Christian Dior stock in exchange for 49.9 percent of Djedi, the holding company that controls 86.8 percent of Guerlain. LVMH already owned the remaining 14.2 percent.

This acquisition values Guerlain at about $770 million (4.4 billion francs), or more than twice its 1993 sales of $351 million (2 billion francs) at current exchange rates.

In the four days of trading this week, since the Guerlain acquisition was announced Friday, the price of Christian Dior stock rose 7 percent, closing Thursday at $77.20 (440 francs).

“I don’t think that LVMH paid too high a price,” said Jean-Marie L’Home, a luxury goods analyst with Paris broker BZW Puget Mahe. “If you average 1992 and 1993, they paid 23 times earnings, while Elf-Sanofi paid 28 times earnings for Yves Saint Laurent, though admittedly YSL’s name has greater renown.”

There is plenty of speculation as to why the Guerlain family sold out. Their company has fairly consistently earned a net profit margin of 10 percent on sales and apparently was relatively debt free.

“It was a family decision,” said Jean-Pierre Guerlain, head of Djedi, the family’s holding company and president of the supervisory board of Guerlain SA. He is also the great-grandson of Pierre Francois Pascal Guerlain, who founded the company in 1828.

“I can’t explain the motivation of each and every member of the family, but some of them clearly wanted to sell,” Guerlain said. “It was a decision we made jointly. There’s no split.”

He also rejected rumors that the family felt forced to sell because it didn’t have sufficient funds to finance future development.

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“That’s completely untrue. It’s absolutely not the case,” maintained Guerlain. “We weren’t short of money when we launched Samsara [in 1989], were we? We didn’t need a cash infusion then and we don’t now.”

Guerlain also undertook in 1993 the launch of Heritage, a scent aimed at making the company a factor in the men’s market.

However, analysts argued that without the backing of a major player with deep pockets, Guerlain’s long-term outlook was uncertain.

“Their future was tricky, for the simple reason that year after year each launch became a bigger and bigger risk,” said L’Home. “It was bound to become harder and harder for them to stay in business, except if they adopted a Boucheron strategy, with very selective distribution, though that wasn’t really in the cards.”

Patrice Dannaud Vizioz, managing director of Parfum Montana, said, “It was widely expected in the industry. Ever since LVMH bought 15 percent, there was a strong possibility they would get control.

“In the business today it’s clear you need a strong structure to be a success. Working for a small house is fun, but in the future there will be fewer and fewer of them.”

Ironically, in 1987 Louis Vuitton acquired 14.2 percent of Guerlain under the management of Henry Racamier, the executive whom Arnault later forced out after a bitter court battle. Vuitton paid $41.1 million (230 million francs) for its 14.2 percent stake.

“The family didn’t seem so united,” said L’Home. “The fact that they created that holding company a few years ago was proof of that. And who was it that sold the first 14 percent to Louis Vuitton but a family member?”

L’Home predicted that LVMH will move steadily to strengthen Guerlain’s global distribution, especially in Asia, where “Guerlain remains weakish.”

“There’s plenty of room for growth,” the analyst emphasized. “They will also gain from lower advertising costs. Guerlain probably pays about 10 percent more than companies in the LVMH group.”

Some executives here have said that Guerlain could not continue to grow on its own in a world where more and more prestige brands are part of large conglomerates like L’Oreal, Elf-Sanofi and LVMH.

“To be an international brand, you need to have that worldwide distribution,” one banker said. “Guerlain is very strong in some zones, like France, but very weak in others, like the U.S.”

L’Home also believes that LVMH won’t make radical changes internally.

“There isn’t a lot of restructuring needed in Guerlain. They have had very healthy margins for many years,” he noted.

Arnault, when announcing the deal, said, “There is no question of changing the present equilibrium. The association of our groups will give a natural Älan.”

Still, Arnault does have a reputation for making changes in the senior ranks of fashion and beauty companies he takes over, and many here believe that the days of Guerlain president Jean-Michel Paulhac may be numbered, though Guerlain denied this would be the case.

“Just because we have gone into partnership with a great group doesn’t mean we are going to change all of a sudden. Guerlain has its own structure, and research and tradition. We even have our own nose, who is a family member,” he said, referring to his nephew Jean-Paul Guerlain, the in-house perfumer.

Paulhac, reached at Guerlain headquarters, declined comment.

News of the acquisition elicited enthusiasm from many people in the French luxury-goods arena.

“I say bravo for Mr. Arnault,” said Ralph Toledano, president of Karl Lagerfeld. “Guerlain is a wonderful company, to my mind the best French perfume brand. But for a company of Guerlain’s size to really grow, it needs the sort of financial muscle that LVMH has.”