Richemont’s (CFR.S) perfect match would come with a luxury price tag. Chairman Johann Rupert acknowledged on Friday that the $60 billion owner of Cartier had been approached by several suitors. Rupert has plenty of options, but the deal that makes the most sense will require a big concession.
Richemont is emerging as a pandemic winner. Sales at Cartier and jeweller Van Cleef & Arpels jumped 62% in the quarter ending March. But 70-year-old Rupert’s company is still heavily dependent on jewellery and watches, which made up some 73% of sales last year and can be more volatile in crises. A revitalized Tiffany after its acquisition by LVMH (LVMH.PA) is a threat.
Rupert may need to bulk up in fashion, according to Reuters.
With 3.4 billion euros of net cash, Richemont could swallow a weaker rival, such as Salvatore Ferragamo (SFER.MI) or Burberry (BRBY.L). But it would take years to turn them around, and neither is cheap. Assuming a 30% takeover premium, an acquisition of either company would deliver a tiny 3% return on invested capital, Breakingviews calculations show.
Merging with a larger rival sounds better, such as Hermès International (HRMS.PA), Chanel or Kering (PRTP.PA). Yet, at $146 billion, Hermès is more than twice Richemont’s size. Chanel is smaller, but its owners, the Wertheimer brothers, have eschewed a public listing.
That leaves $113 billion Kering, which just sold another chunk of Puma (PUMG.DE), as the best partner. Its chief executive, Francois-Henri Pinault, needs to reduce his dependency on the Gucci brand. Meshing the two together would create a $180 billion powerhouse in both soft and hard luxury.
There’s a snag. Special B shares entitle Rupert to 50% of Richemont’s voting rights even though they only account for 9.1% of the equity. The Pinault family’s Artemis holds 58% of Kering votes. At current market prices, Richemont shareholders would probably own just 37% of the combined group, assuming a nil-premium merger. Rupert would no longer be in control. If he had to give up his special shares, his economic stake would entitle him to just around 3% of the merged company’s votes.
There could be room to negotiate. Rupert might be able to extract a rich premium for giving up his special votes, or hang on to some of them, and secure board seats. He would still be playing second fiddle to the Pinault family. But given his current strength, and the looming threat of Tiffany, now is a good time to strike a deal.