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Tuesday, March 8, 2011

LVMH Becomes the New Big Kid on the Luxury Jewelry Block

Bernard Arnault

For Bernard Arnault, the “King of Luxury,” the acquisition of Bulgari is somewhat unusual. Not because of the type of company being purchased, but because of what he gave up to acquire the Italian luxury jewelry house.

The deal is going to cost Arnault, LVMH chairman and CEO, more than 3.7 billion euros ($5.2 billion), consisting of approximately 1.9 billion euros in shares to the Bulgari family and about 1.84 billion euros in cash to buy out the other shareholders. In addition, the acquisition will dilute Arnault holdings of LVMH to 46.5 percent, while Bulgari will get a 3.5 percent share of the luxury goods conglomerate and become LVMH’s second largest shareholder. Bulgari will get two seats on the LVMH board, the family will continue to control Bulgari and Bulgari’s chief executive, Francesco Trapani, will lead LVMH enlarged watches and jewelry activities, which includes the brands TAG Heuer, Chaumet, Zenith, Hublot, Fred and De Beers. Philippe Pascal.

What does Arnault get in return? In a single swoop of his pen, LVMH’s jewelry and watch holdings will double (from 5 to 10 percent), enabling LVMH to take on its biggest rivals in the “hard luxury” sector, Switzerland’s Richemont, owners of Cartier, and the Swatch Group. He also gets one of the most famous luxury jewelry brands in the world, known for adorning the most glamorous Hollywood stars (including Elizabeth Taylor) and royalty.

Arnault was quoted as saying that hopefully it will show Hermès (a reluctant target of Arnault) that he is able to work with a family-owned company. However, that may be premature as the working relationship hasn’t yet begun.

Both companies say the deal will create a more efficient distribution system for Bulgari (which has been struggling to make a profit in recent years) and help it to expand its network of stores, particularly in high-growth areas such as China.

The stock markets seem to like the deal, as the LVMH price has risen since the merger. Those in the jewelry industry have raised questions on whether it will create a jewelry company that is less distinguishable from other luxury jewelers.

No matter what happens, one thing is certain, the luxury jewelry sector has a new player.

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