Billionaire owner of Cartier and Piaget, Johann Rupert, once referred to himself as “Rupert the Realist.” As he approaches 73, the president of Compagnie Financière Richemont may have to resort to his boastful pragmatism to decide the future of his $81 billion luxury empire.
In the run-up to the Covid-19 pandemic, Richemont’s shares were struggling to match the price of its biggest rivals. Investors punished the expensive 2018 acquisition of digital group Yoox Net-A-Porter, which it is now selling. The depressed price of the Swiss group came to attract the interest of Kering boss Francois-Henri Pinault, who proposed a merger.
It seems that the tables have turned. The rapid growth of Richemont’s high-margin jewelery business has seen shares rise 63% in the past two years. But, even at a higher valuation, Rupert could receive new offers: Bernard Arnault, owner of LVMH, a conglomerate valued at $430 billion, would be delighted to buy Richemont, the Swiss newspaper Finanz und Wirtschaft hinted last month.
Richemont’s tight governance structure means that no transaction could take place without Rupert’s consent. But an approach by Arnault could cause the South African tycoon to seriously reflect on the prospects of his company. With free cash flow of about $17 billion this year, LVMH could afford to buy Richemont for cash without needing to borrow heavily. But that would exclude Rupert from any future growth for the giant Tiffany-Dior.
A cash and stock offer might be more palatable. However, finding the appropriate balance of power would be tricky. Despite owning only 10% of Richemont’s outstanding capital, Rupert controls 51% of the voting rights thanks to his special class B shares. Maintaining that same power in a hypothetical merger seems difficult.
Rupert may decide to continue as is. Richemont’s biggest brand, Cartier, which is expected to achieve an operating margin of 4 billion euros in the 12 months to March 2024, could sell for 80 billion euros ($84 billion) on its own. if it were valued at a multiple of 20 times, the same as other brands in the luxury sector, according to Breakingviews calculations based on data from Visible Alpha. That exceeds Richemont’s current market capitalization, indicating the stock has room for growth.
To get more backing from investors, Rupert may need to clarify his succession plan. Rivals have taken steps to involve the next generation. Arnault chose his daughter Delphine to lead his second-biggest brand, Christian Dior. On the other hand, the owners of Prada have appointed the veteran manager Andrea Guerra as CEO, to prepare her son, Lorenzo Bertelli.
Rupert has not indicated whether he intends to hand over command to his son Anton. But he hasn’t clearly promoted any of Richemont’s top managers either. Holding on to the company that owns Cartier makes sense, but a pragmatic approach to succession would help unlock its hidden value.
FOR MORE INFORMATION: BREAKINGVIEWS.REUTERS.COM
The authors are columnists for Reuters Breakingviews.
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