Arnault is right, but the City may not buy it plan?
Saturday 21 June 1997
For the super rich, money is no object. The difficulty is not the one faced by most ordinary mortals - making enough of it to pay the bills - but rather it is in finding the things and the time to spend it on.
As with most phenomenon, there is a piece of business school jargon to describe the tendency for scarce, luxury assets to take on these absurdly high valuations. My thanks to Jon Moynihan, senior partner of the PA Consulting Group, for pointing it out to me. It is called the "monotonically increasing utility curve". Yes, well, moving swiftly on what this describes is the self evident truth that the richer a person gets, the more prepared he becomes to spend his money in a frivolous fashion.
When someone is making more money in a minute than he can possibly spend in a year, one of the things he might buy is fine wines. When eventually he realises that he has bought more wine than he can possibly drink, he sells it on to the next man, generally for an even higher price. That's what Andrew Lloyd Webber did recently, anyway. There is said to have been quite a lot of Yquem in his cellar. At these rarefied levels, money making becomes self perpetuating. Ridiculous and unfair though the process might seem, it is the way of the world, and it takes not a little entrepreneurial flair and skill to know how to exploit it.
One of those to have done so successfully is Bernard Arnault, who runs the French luxury goods company LVMH. His brands include Louis Vuitton luggage, Christian Dior fashion and perfume, Hennessy cognac and Moet champagne. None of these businesses is right at the top of the curve. To a greater or lesser extent, they are all "commodity" goods. But they are also priced and branded to give the illusion of luxury, style and scarcity. So he's quite a long way up the curve, but because he makes his goods accessible to the masses, these businesses are still also a long way from the high-altitude summit.
Last year, however, he attempted to go the whole hog by tabling a bid for Chateau d'Yquem that valued this 260 acres of vines at an astonishing pounds 120m. Some accused him of an almost criminal waste of shareholders' money, a personal, vanity purchase that could never be justified on commercial grounds, so full a price did he seem to be paying for such a tiny vineyard. Even judged by what the likes of Andrew Lloyd Webber are prepared to pay for the product, Mr Arnault seemed to be wildly overpaying for the company.
Actually, the price of a bottle of Yquem has gone up so much since then, that Mr Arnault's flight of fancy may yet be commercially vindicated. All the same, it is hard to imagine a British or American publicly quoted company engaging in a top of the curve purchase of this sort. Shareholders would never weather it, for it will be many, many years before we know for sure whether this really was a vanity purchase or whether Mr Arnault can generate a decent return. Rightly or wrongly, this sort of long-term perspective is alien to the Anglo Saxon way of doing things.
Nor do our Anglo Saxon markets really know what to make of Mr Arnault's purchase of a 6 per cent stake in Grand Metropolitan. Indeed the general view in the City is that he is being naive in believing he can influence the company's planned merger with Guinness in this way, and is almost certainly wasting his money.
I don't wholly share this view. What Mr Arnault is proposing here actually makes a good deal more sense in corporate terms than what Guinness and GrandMet are trying to do. George Bull and Tony Greener, chairmen respectively of GrandMet and Guinness, have argued that there is virtue and value in the merger on size grounds alone, since it will create a "consumer products" group of scale able to stand its ground against the likes of Nestle and PepsiCo. This is nonsense. Nothing links the selling of fast food with the marketing of high value spirits brands, or indeed Guinness brewing with Green Giant tinned sweet corn. There are, however, obvious and considerable cost and brand management benefits to be had from merging the two companies' liquor businesses, United Distillers and IDV.
The logical thing to do then, argues Mr Arnault, is to go a stage further with the liquor interests so that his own Moet Hennessy is brought into the merger. This world beating branded drinks company would then be demerged as a separately listed company. The rump GrandMet and Guinness businesses would be left to their fate. Inevitably, he says, that is where we will all end up anyway, only it will take three or four years for it to happen via the Bull/Greener route. Why not leap frog all that and do it my way, he asks.
The trouble is that while it is impossible to fault the logic, it is easy to be suspicious of the motive. I once asked Mr Arnault what the purpose of the "cascade" structure of his corporate empire was. This is a quite common form of corporate organisation in France under which company A has a stake in company B which has a stake in company C and so on and so forth, each company having its own outside shareholders. With disarming candour Mr Arnault said that it was really quite simple. "It is so that I can control a large and diverse corporate empire from a very small capital base".
Plainly Mr Arnault saw absolutely nothing wrong in this. In Anglo Saxon markets, however, this kind of thing is regarded with extreme suspicion, for it allows ample scope for confusion of ownership and obfuscation of purpose. Private and public interests tend to get mixed in a way that would be unacceptable to most City investors.
Most of the time Mr Arnault's interests will coincide with those of his outside shareholders, but not always. When they don't, there's no doubt about who's going to have the upper hand. Until he spells out exactly what his plans are for the new super-drinks company, and who's going to end up with what shareholding, he's unlikely to get much of a look in with Guinness and GrandMet shareholders. They are not going to allow themselves to become just another disadvantaged part of the Yquem buying Arnault cascade. Logic and determination is certainly on Mr Arnault's side, but the City is going to take a lot of convincing that this is actually something which is in their interests as much as Mr Arnault's.
There's a fundamental difference of approach and culture involved here which Mr Arnault won't find it easy to breach. There are also some powerful egos tied up in it all. Neither Mr Greener or Mr Bull will yield easily to Mr Arnault's demands.
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