LVMH’s (MC) agreement to purchase Italian luxury goods maker Bulgari for EUR 4.3 billion is a net positive in our view. Although the purchase price might look rich at roughly four times 2010 sales of EUR 1 billion or compared to depressed 2010 earnings, we feel some of Bulgari's inefficiencies at retail, in working capital, and obstacles in Japan can be improved by LVMH, creating synergies over the long run. One must consider the alternative of a deal not happening; in this case, Bulgari might have gone to a strong rival such as Richemont. We are putting our fair value estimate under review to assess the potential synergies between the two companies, but our preliminary analysis suggests a moderate increase to our fair value estimate.
Strategically, Bulgari fits into an area where LVMH was weak--watches and jewellery--which was only 5% of the business. By approximately doubling the size of the watch and jewellery group, we expect some modest synergies on the cost side. Longer term, we think that LVMH’s contribution will be growing sales and creating a greater presence in a number of outlets and channels around the globe, particularly in China and other high-growth Asian markets.
We are not concerned that the new majority shareholder will dilute the Bulgari brand. Admittedly, the Bulgari brand is already quite broad but positioned at the higher end of the luxury spectrum. Although management says it has not planned any strategic changes, we expect LVMH focus on the core business of jewellery and watches and to exit low-return businesses like hotels, for example. Some might point out that LVMH, which has amassed a stable of over 60 brands has some brands since the Moet Hennessey group was merged with Louis Vuitton in 1987, has certain brands that are more broadly distributed and have more mass appeal than Bulgari. However, we believe LVMH on a whole has done a good job of managing each brand’s overall position, higher or broader. Chairman Bernard Arnault is quick to point out “We did not sell T-shirts when we acquired Cheval Blanc or Chateau d’Yquem”; but they did make an elegant website.
Ironically, the “synergies” that LVMH is hoping for to extract from its partnership with Bulgari were recently spurned by rival Hermes. LVMH has acquired a 20% stake in the French premium luxury goods maker, but management of the family-controlled company emphatically said LVMH had “nothing to offer” and that there would be “no contact” between the companies. Bulgari, which is 50.4% owned by the Bulgari family, felt better than the Hermes descendants about accepting a high 60% market premium price to relinquish their closely held shares. The Bulgari insider shareholders will be paid with 16.4 million LVMH shares valued at EUR 1.9 billion, making the Bulgari family LVMH’s second largest shareholder with roughly 3.4% of the equity in the company. An additional EUR 2.4 billion in cash and debt will be used to tender for the additional minority Bulgari shares and convertible debt outstanding at a EUR 12.25 offer price, roughly a 60% premium to last Friday’s close on the Italian market.
