Italian fashion leader Gucci Group NV said yesterday that it agreed to pay $1 billion for Sanofi Beaute, which includes the clothing label and perfume brands including Opium, Fendi, Krizia and Van Cleef & Arpels.
Gucci, headquartered in the Netherlands, will pay $698.7 million in cash and assume $267.4 million in debt for Sanofi, owned by businessman Francois Pinault. Gucci will also pay a total of $70 million to designer Yves Saint Laurent and Sanofi chief executive Pierre Berge for rights held individually by them.
With Sanofi under its fold, Gucci becomes the third-largest fashion company in the world, behind leader LVMH Moet Hennessy Louis Vuitton and Vendome, a unit of Cie. Financiere Richemont.
"We intend to work with Yves Saint Laurent management and apply Gucci's . . . business model to reposition [YSL] in the luxury goods market," said Domenico De Sole, president and chief executive of Gucci Group.
The fashion industry has been consolidating in recent months in a bid to lower costs by exploiting distribution and marketing synergies. A company release said Gucci intends to apply "rigorous control to design, production and distribution" to maximize growth and profitability.
According to Gucci, it plans to open more stores in key luxury goods markets and invest in further building YSL. "Gucci is trying to establish itself as a multi-brand luxury goods company," said Ari Bensinger, equity analyst at S&P Equity Group.
Besides YSL, Gucci will now own the Roger & Gallet brand and the perfume licenses for Oscar de la Renta. Sanofi's perfume portfolio, which is built around YSL's popular Opium and Paris fragrances, raked in $583 million in revenue last year. Gucci plans to introduce more products and invest in brand promotion.
The haute couture business of Sanofi will be retained by Pinault's holding company, Artemis SA, and will operate separate from YSL. Artemis also controls Pinault-Printemps-Redout SA, which has a 42 percent stake in Gucci.
Wall Street greeted the news by pushing Gucci stock up $2.68 3/4, or about 3.5 percent, to $81.37 1/2. The stock has doubled in price in the past year. "Although the acquisition will be dilutive in the near term, there's a lot of confidence in the management and earnings potential," said Janet J. Kloppenburg, senior consumer research analyst at Robertson Stephens.
The deal is expected to dilute Gucci's earnings by less than 10 percent in the first two years and boost earnings by 2003.
De Sole and his team are credited with turning around the Gucci brand name by beefing up its product portfolio, repositioning its image and aggressively pushing it in retail markets. Wall Street expects De Sole to "do a Gucci" to YSL, which has been under the weather for some time now.
Fortunately for Gucci, Asian markets--where it has a strong presence--have been on the mend since early this year. The market recovery pushed net revenue up 10 percent in the second quarter ended July 31, and 20 percent for the third quarter ended Oct. 31.
"It's clear that Gucci's core business has started to grow again after the fall of 1998," Kloppenburg said.