The Swiss paper Finanz und Wirtschaft reported “whispers”, in the luxury industry, on a potential takeover of Richemont by LVMH.  We look at the rationale behind this rumor.

The financial rationale

1-Valuation gap: From a valuation perspective, in an all-paper transaction and before potential synergies, the deal would be accretive day 1 as Richemont always traded at a 15/20% discount versus LVMH. An all-paper transaction could deserve a higher premium than a mixed offer (cash and shares).

2-Important synergies: LVMH has an outstanding track record for growing revenues and keeping costs under control. As Bulgari acquisition (2011) showed, LVMH reengineered a family high-end jewelry business in 8 years. Revenues doubled between 2011 and 2019 (last reference pre covid) and operating income were multiplied by 5. Assuming a conservative 12% cost cutting/synergies program on Richemont cost base would give EUR 1.8 billion of synergies. Applying LVMH EV/EBITDA multiple of 14x, this would create a EUR 25 billions  upside on Richemont market cap (or 35% upside)

3-Hard luxury multiple re-rating: Hard luxury stocks even when non-premium like Tiffany (17 EV/EBITDA take out multiple) trade at higher multiple than soft luxury.

4-The “rich dilemma”: Luxury companies are stuck in a “rich dilemma”. They generate a lot of cash and must find targets to allocate in a non-dilutive way this cash flow in order to avoid dividend and share buyback which will be perceived as ex-growth symptoms by investors. Richemont would be a perfect target to use the EUR 21 billion per year LVMH cash flow and the under leveraged balance sheet (less than 2 times debt/EBITDA ratio)

The industrial rationale

1-Jewelery is a structural growing segment where branding is critical. It is no coincidence if all big LVMH acquisitions over the past 15 years have been in hard luxury (Bulgari and Tiffany) when many soft iconic luxury names were unofficially on sale (Burberry and Prada). Barriers at the entry are higher than in soft luxury (dependent on a designer) and branding jewelry especially in Asia has just started.

2-The market is still very fragmented: According to Bain, 82% of the jewelry market is owned by small independent companies. Cartier, the clear number one has only a 7.5% global market share. This implies a huge potential for consolidating the market. Tiffany and Bulgari the 2 LVMH leading jewelry brands hold only a combined market share of 6%. LVMH global jewelry market share will move day 1 from 6% to 16% with the acquisition of Richemont.

3-Premiummization of LVMH jewelry portfolio: All Richemont jewelry brands (Cartier and Van Cleef) are in the high-end segment according to the Bain Consulting definition when only one of LVMH brands (Bulgari) is in this segment. Tiffany is in the aspirational segment according to Bain.

The succession rationale

As already flagged in a previous Deshima blog “Family succession plan in luxury” 12/01/2023, there are contrasting strategies between LVMH and Richemont regarding succession plans.

1-LVMH has a plan. Bernard Arnault has prepared his succession by placing trustworthy family candidates in strategic positions. He has several highly qualified children who could pretend to succeed him but also trustworthy managers like Pietro Bieccari who could be a “pope of transition”.

2- Richemont has no plan. Johann Rupert current CEO and controlling shareholder of Richemont is 72 years old, he has only one child who is a director but not a trustworthy candidate to lead the company, and there is no manager that could become a pope of transition.

Selling Richemont to LVMH would have several merits for Johann Rupert

-Selling at 50% premium without destroying value for LVMH shareholders (15% share discount plus 35% of synergies)

-Keeping his holdings in a family run business

-Closing the performance gap between LVMH and Richemont shares: Over 10 years, Richemont shares are up 86% versus 566% for LVMH.

-Finding a succession plan

The failed hostile takeovers of Gucci and Hermes convinced LVMH that only a friendly approach can work. But recent history suggests that, in the world of luxury, succession can be more emotional than rational. 

*Richemont is owned by Deshima certificate “Croissance Contrariante Europe.”