Kering's Rise to Power: The Epic Battle for Gucci

Based in Paris, Kering is the fifth-largest luxury group globally, owing to its rich history and extensive portfolio of premium brands including Gucci, Saint Laurent, Bottega Veneta, and Balenciaga, among others. This article delves into various aspects of Kering, highlighting its history, diverse brand portfolio, and key historical moments – including arguably the most crucial one in the history of the luxury landscape – the battle over Gucci with LVMH and Bernard Arnault.

French entrepreneur Francois Pinault founded his first business, a timber company, in the early 1960s, leveraging his family's background in the industry. He rapidly expanded his business by acquiring undervalued firms, benefiting from government incentives to rescue failing companies. This strategy enabled him to build a significant fortune early on.

By the 1990s, Pinault had shifted his focus from timber to retail and luxury goods. His company acquired Au Printemps SA, a French department store chain, subsequently evolving into the Pinault-Printemps Group. In 1994, it merged with La Redoute, a clothing retailer, forming Pinault-Printemps-Redoute.

The transformation into a luxury powerhouse took a giant leap in 1999 with the acquisition of Gucci. Pinault-Printemps-Redoute first acquired a controlling 42% stake in the Gucci Group for $3 billion, following a prolonged and highly publicized battle over the brand with the biggest rival LVMH, headed by Bernard Arnault. Pinault-Printemps-Redoute increased its stake in Gucci to 67.6% in 2003, and further to 99.4% in 2004.

After acquiring Gucci, Pinault-Printemps-Redoute expanded its luxury portfolio by acquiring Boucheron in 2000, and Bottega Veneta and Balenciaga in 2001. These strategic acquisitions laid the foundation for what today is the fifth largest luxury goods company globally, today known as Kering after the name change in March 2013.

Kering's most notable acquisitions over three and a half decades – including brands such as Gucci, Bottega Veneta, Balenciaga, and Valentino:

Kering's portfolio comprises some of the most prestigious names in the luxury industry. This portfolio includes renowned houses in fashion, leather goods, and jewelry, such as Gucci, Saint Laurent, Bottega Veneta, Balenciaga, Alexander McQueen, Brioni, Boucheron, among others. Each brand under Kering's umbrella maintains control over its own product design, brand image, and sourcing strategy. At the same time, they benefit from the group's extensive network and expertise in retail strategy and product development. This creates beneficial synergies among the different brands.

Kering's largest brands by revenue as of Q3 2023 are Gucci, Saint Laurent, and Bottega Veneta, with Gucci contributing 50% of the total revenue, Saint Laurent 16%, and Bottega Veneta 8%. Here's a visualization of Kering's revenue by brand:

Kering Revenue by House

In 1998, neither LVMH nor PPR – known as Kering since 2013 – had any publicly-known ownership stake in Gucci. It wasn't until March 1999 that PPR would make its first move to acquire shares in the brand founded by Guccio Gucci. This was the starting point of what later would be described by the New York Post as 'the bloodiest fight in fashion.'

On January 5th, 1999, Gucci's then-CEO Domenico De Sole was traveling from New York to London when he received an unexpected phone call. Yves Carcelle, a longtime friend and Louis Vuitton director, was on the other end. Carcelle informed De Sole that LVMH had acquired a 5% stake in Gucci, assuring him that the investment was passive and Arnault's intentions were purely friendly. He even suggested potential collaborations between the two companies, as reported by Vanity Fair. De Sole, the 55-year-old Harvard-trained lawyer and shrewd businessman, ended the call stunned.

The news became public the following day on January 6: LVMH had quietly bought a 5% stake in Gucci through the open market. Gucci's board members quickly convened to discuss the implications. They foresaw two possible scenarios: either LVMH would attempt an outright purchase of Gucci, or they would gradually increase their stake, aiming for a complete takeover further ahead. After all, as early as 1999, Arnault was already known for his ruthless acquisition strategy. The reality of their intentions would soon become evident to both Gucci and the world as the latter emerged as LVMH's strategy.

By mid-January, LVMH disclosed that it had increased its stake in Gucci to 26.7%, buying shares from various sources, including the Chicago-based Harris Associates' Oakmark Select Fund. The news of LVMH's initial acquisition and Arnault's ongoing efforts to purchase any available Gucci shares shocked industry insiders and Gucci's own team – they had now realized that Arnault was going for a complete takeover.

Arnault, then 50 years old and known for his American style of aggressive corporate raiding and ruthless decision-making, was not satisfied with being just one of Gucci's largest shareholders. He arranged a meeting with De Sole, which took several days to schedule. The meeting eventually took place at Morgan Stanley's office in Paris, De Sole's chosen location, as opposed to Arnault's initial suggestion of a dinner.

Arnault proposed that he be allotted three seats on Gucci's board, given his significant ownership stake. De Sole, well-prepared for the meeting, firmly opposed this, arguing that no one from LVMH would be given a place on Gucci's board due to their rivalry. The meeting ended without compromise. Days later, on January 27, 1999, Arnault had further increased LVMH's stake in Gucci to 34.4%.

On January 28, the day after learning of LVMH's increased stake, De Sole met with Arnault again. He proposed two board seats for LVMH, instead of three, in exchange for reducing their stake to 20% and guaranteeing Gucci's operational independence and leadership control by De Sole and Tom Ford. The meeting, however, ended without a resolution.

A few days later, in early February, Arnault rejected the offer and promptly approached Gucci's board to demand a special meeting of the company’s most prominent shareholders. Showing no interest in further negotiations, Arnault intended to nominate a ninth member to the company’s existing eight-member board to represent LVMH's interests. This move was within his legal rights, as noted by the New York Times, which stated that Gucci’s bylaws allow 'anyone with a stake of 10% or more to request a special meeting, which must be held within six weeks.'

However, that special meeting never took place. Instead, De Sole countered with a new proposal for Arnault: the opportunity to purchase the entire company at $85 per share. Arnault declined this offer but agreed to pause any further increase in LVMH's ownership of Gucci – in exchange for several seats on Gucci's board.

To De Sole, Arnault's openness to this proposal was an unexpected and welcome development. Reacting swiftly, De Sole had an agreement drafted and sent to Arnault. LVMH was given a two-day window to review, sign, and return the agreement, with a strict deadline of February 17. This was a one-time offer, with no room for extensions. In a dramatic turn of events, at precisely 5:01 pm on the deadline day, the agreement was faxed back to De Sole's office in Milan – unsigned.

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In response, Gucci established an Employee Stock Ownership Plan (ESOP), a tool typically used to grant employees ownership interests in the company. However, Gucci's underlying intention was strategic: the ESOP created a new 42% stake in the company, significantly diluting the shares of existing stockholders, including LVMH. As a result, Gucci's stock sharply fell about 20% within minutes. This move was a clear declaration of war from Gucci, setting the stage for further escalation in the ensuing month.

On March 19, in the middle of the consistent and intense ongoing negotiations, news broke that Gucci had agreed to sell the 42% stake to another Paris-based luxury conglomerate, PPR, for $3 billion. Thus, the formerly uninvolved PPR swooped in to "rescue" Gucci from LVMH. As a result, the rival conglomerate, headed up by François Pinault, was being hailed as a "white knight" while Arnault was portrayed as the greedy capitalist by the media.

In a dramatic twist, reports suggest that LVMH discovered the PPR-Gucci deal just before a scheduled meeting with Gucci executives, intended to further their negotiations. They learned about it the same way the public did, through the news. In other words, LVMH was completely blindsided.

Before the Gucci-PPR deal was finalized, the Arnault-owned entity expressed its fury. Initially, it made two bids to purchase 100% of Gucci, including PPR's shares. The first bid was at $81 per share, followed by a second at $85 per share. Both bids failed, and they were notably higher than PPR's winning offer of $75 per share.

The deal between Gucci and PPR was put on hold in late April 1999. This occurred when the Enterprise Chamber of the Amsterdam Court of Appeals decided to freeze the transaction, halting the $3 billion PPR had paid for a 42% stake in Gucci. Still not satisfied, LVMH escalated its efforts by requesting an investigation into Gucci's management practices. This included scrutiny of the ESOP and the subsequent transactions related to the PPR deal.

In a legal proceeding in the Netherlands, where Gucci was incorporated and where LVMH had filed its numerous lawsuits, a Dutch judge ruled that Gucci must consider LVMH's takeover bid. While it initially seemed that LVMH and Gucci might reach an agreement, Gucci rejected LVMH's generous $85 per share offer in early April.

A month later, in May 1999, Gucci and PPR formally received approval from a Dutch Court to proceed with the sale of a 42% stake in Gucci to PPR. Following this ruling, De Sole expressed his satisfaction, stating, "I'm very happy. It is a great victory for us." Anticipating ongoing challenges, De Sole also told the press, "LVMH can continue to torment us, but they're not going to get very far."

Just hours before the tragic events of September 11, 2001, when two planes struck the Twin Towers in New York, news emerged that one of the most intense fights in corporate history had reached a climax. The revelation emerged following a late-night agreement in Paris on Sunday, less than 48 hours prior to the tragic events of September 11th.

Specifically, François Pinault, father of the current Kering chairman François-Henri Pinault, agreed to pay $806 million to Bernard Arnault, CEO and chairman of LVMH, for 8.6 million Gucci shares. This agreement marked the height of a fierce two-and-a-half-year conflict. While Pinault and Arnault reached an agreement on that Sunday evening in Paris, this event marked far from the end of the monumental battle between these two conglomerate-builders and their influential inner circles. The rivalry continues to this day. Interestingly, Bernard Arnault attempted a similar move against Hermès in 2008, but it was skillfully countered by the Dumas family and ultimately failed.

The acquisition of Gucci marks the most transformative and important event in Kering's history. As the fifth-largest luxury company in the world, the company continues to influence the global luxury industry. Gucci stands out as its largest revenue stream, contributing to 50% of sales.

In summary, the journey of Kering is a remarkable tale of strategic acquisitions, brand building, and corporate battles. Originating from a timber business, François Pinault transformed his enterprise into a global luxury powerhouse. The ongoing rivalry with LVMH, highlighted by the intense battle over Gucci, underscores the competitive dynamics of the luxury market and continues to shape the strategies of both conglomerates.