The LVMH bid
About a week ago, LVMH announced a successful bid for control of the publicly traded Italian jewelry manufacturer and retailer, Bulgari. Bulgari’s offerings, many of which reflect the founding family’s Greek heritage, mostly range in price from $2,000-$10,000.
LVMH will issue shares of its stock in exchange for the 51% of Bulgari controlled by the Bulgari family. It is offering €12.25 in cash for the 49% held by third parties.
what’s in this for Bulgari?
1. A significant part of Bulgari’s business is high-end watches, the most extremely cyclical category in the fine jewelry business. Watch sales are especially difficult to monitor, since wholesalers play such a large role in their distribution. As a result, economic downturns have tended to be white-knuckle events for the company–and its stock. Being part of a larger, more stable conglomerate will mean less wear and tear on management’s stomach linings.
2. The Bulgari family gets two seats on the LVMH board, so it retains a management presence in luxury goods.
3. Younger-generation family members who don’t want to be involved in the business and would rather have their inheritance right now and in cash will be able to sell without endangering the Bulgari family’s control position.
4. Francesco Trapani, a Bulgari nephew and the current Bulgari CEO, will become head of the LVMH watches and jewelry business, an organization twice the size of Bulgari.
…and for LVMH?
1. The larger fine jewelry business means LVMH will be in a stronger competitive position versus other luxury goods conglomerates like Richemont.
2. The willingness of an entrepreneurial luxury goods family like Bulgari to join the LVMH fold contrasts sharply with the frosty reception of the Hermès management when it learned LVMH had acquired a large ownership position. The Bulgaris, fellow entrepreneurs, may be able to smooth ruffled feathers in a way that Bernard Arnault has been unable to.
3. The Bulgaris will likely also be instrumental in convincing other European luxury goods families to follow their lead.
Wall Street rumors have TIF (I own it) as the next target of LVMH and Mr. Trapani.
I don’t agree. The main attraction of TIF would be the fit between its business and Bulgari’s. TIF is a dominant factor in “statement” jewelry costing $25,000-$50,000 or more. The company is unique in its ability to–at the same time–be a leader in the market for jewelry and other gifts that retail for $500 and below, without diluting its brand image (i.e., alienating the very big spenders). I don’t know why, but TIF has never been very good in the middle; Bulgari would fill the doughnut hole in Tiffany’s offerings. That’s the positive side.
On the other hand, Europeans don’t regard TIF as a legitimate luxury brand. That’s partly because it’s an American company, partly because of its lower-end business.
What is Mr. Arnault’s game plan? I think it’s to collect up as many small, inefficiently run European family luxury goods businesses as he can over the next few years. He’ll doubtless be able to use the brand names he acquirers more effectively than their current owners. And he’ll enjoy manufacturing, distribution and marketing synergies.
His main selling points will be two: the positive experience of the Bulgari family, and the ego appeal of joining a very exclusive club. Were he do anything so déclassé as acquiring an American “quasi-luxury” company like TIF, a lot of the positive effect of the Bulgari merger on potential European luxury acquisition candidates would be lost. Yes, TIF is doing a land office business in Europe currently. But that’s because the affluent there are trading down.
TIF may eventually be on the Arnault to-do list, but I think he’s gunning for smaller, local game first.