LVMH, the world’s leading luxury goods group, was quick to scotch reports it was considering selling its Moët-Hennessy champagne and cognac business to Diageo. But that does not mean the rumours will disappear, nor indeed stop the markets speculating whether the French company’s cocktail of fashion and premium drink brands still makes economic sense.
Both the fashion and drinks sectors are suffering from softening global demand. So it would be logical for a consummate businessman such as Bernard Arnault – the chairman and controlling shareholder of LVMH – to be analysing the best way forward for his group.
The question now is whether it is better to keep a portfolio of high fashion, accessories and perfume brands – such as Louis Vuitton, Fendi, Marc Jacobs and others – under the same umbrella as a whole rash of prestigious wine and spirits brands, or should it concentrate entirely on the fashion side?
Selling Moët-Hennessy would also raise a substantial amount of cash – possibly €12bn ($15.6bn) – to reinvest in expanding the fashion portfolio. It would provide a useful war chest to pounce on another flagship fashion brand when and if one should come on the market. Mr Arnault has never disguised his interest in Hermès, and he would probably not be indifferent to Armani – nor, for that matter, to Chanel.
The drinks industry is in the throes of a new round of consolidation and it would be no surprise if Diageo were considering reinforcing its position as industry leader, especially at a time when its French rival Pernod-Ricard is snapping at its heels. Diageo, through the old Guinness relationship with LVMH, already holds a 34 per cent stake in Moët-Hennessy. Buying the two-thirds stake of LVMH would make it the undisputed sector leader, as well as giving it ownership of a string of premium wine and spirits brands.
So if it makes sense for Diageo – if the price is right – then does divesting Moët-Hennessy make sense for Mr Arnault? The answer is it probably does not. First, because the drinks business offers him a useful hedge to his fashion business, even though Mr Arnault has always felt more affinity with fashion and retailing than with wines and spirits. Second, because Moët-Hennessy has developed a business model that closely matches the group’s fashion strategy.
Rather than engage in the general consolidation frenzy of the drinks industry, Moët-Hennessy has focused on its premium brands and made selective acquisitions – such as buying the Glenmorangie malt whisky brand – to reinforce its positioning at the very top end of the market. It also manages its brands on the same principle as its sister fashion labels as relatively independent “maisons”. Most of these “maisons” are very French and an inherent part of the country’s heritage.
Not only are they historically much older, but in some cases they are as grand – if not grander – than the group’s fashion houses. Château d’Yquem goes back to 1593, Moët Chandon to 1743 and Dom Pérignon has long been the world’s favourite Benedictine monk, and not just for James Bond. Even though the average profit margins of the drink brands are not as impressive as those of Louis Vuitton handbags, they are big cash flow generators, while Château d’Yquem commands by far the highest margins of all – if, granted, on the most slender of volumes.
All this clearly must be making Mr Arnault think twice before deciding to separate himself from Moët-Hennessy. Before the economic crisis took hold of the world, Mr Arnault invested in partnership with a private equity group in a large stake in Carrefour, the world’s second-largest retail group after Wal-Mart. That investment has so far proved disappointing to say the least and has somewhat blurred his image as the “King of Luxury”. Moët-Hennessy has certainly not done that – quite the opposite.
Deutsche Telekom shares on Wednesday slid for the third consecutive day following the German incumbent’s warning that its gross operating profits were likely to decline by 2 to 4 per cent this year. Barely two months ago the company seemed confident that operating earnings this year would match those of 2008.
The question worrying investors is whether this week’s profit warning simply reflects the generally dire economic situation or more fundamental structural problems. Many consider it is probably the latter, given most of Deutsche Telekom’s competitors appear to be holding up well.
Should this prove to be the case, the German operator may be forced to take another look at its sub-scale mobile activities in the UK and in the US. Ultimately, it will have to decide either to invest more heavily in these markets or, particularly in the US, to divest itself of its American mobile business.
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