| BUSINESSWEEK ONLINE : JULY 31, 2000 ISSUE | ||||||||
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| INTERNATIONAL -- EUROPEAN BUSINESS
Arnault's Shaky E-Empire (int'l edition) Europ@web isn't panning out. What will the luxury mogul do next? When luxury king Bernard Arnault set up Europe's biggest Internet investment fund last summer, he looked ready to build a powerful empire in cyberspace. By taking stakes in dozens of Web startups, the French tycoon planned to create an integrated group of companies called Europ@web that would rival foreign giants such as Softbank and CMGI Inc. But now, those dreams look as flat as a day-old glass of Moet & Chandon champagne. Several key Europ@web ventures have failed to meet expectations. In late June, Arnault pulled the plug on a planned listing of Europ@web, saying he was considering ''strategic alternatives.'' Fine--but what alternatives? Arnault, chairman of LVMH Moet Hennessy Louis Vuitton, hasn't spoken publicly about Europ@web since he canceled the initial public offering. Clearly, though, he is at a difficult crossroads. Arnault has made one of the boldest individual gambles ever on the Internet--putting nearly $500 million of his personal fortune into Europ@web while separately investing more than $300 million in other Web companies. Should he spend even more, change course, or get out? His decision will be closely watched as a bellwether of investor sentiment on Europe's Internet economy. Major action could come soon. Sources close to Arnault say he is courting outside investors for Europ@web. That could give the group a needed boost. But already, it seems clear that Arnault's grand visions will not materialize. ''It's tough for them right now, and they are having to make some pretty severe decisions about what to give up on,'' says French venture capitalist Laurent Massa, who has worked with Europ@web on two projects. But Chahram Becharat, Europ@web's managing director, says that even if new investors join the group, its strategy and holdings are unlikely to change significantly. Arnault's dilemma underscores how dramatically Europe's Internet landscape has changed in the past few months. As in the U.S., tumbling e-stock prices have dimmed the prospects of Web startups. Over the next few months, analysts say, many such companies will shut down or be snatched up by stronger players. But unlike the U.S., where onetime startups such as America Online Inc. and Yahoo! Inc. became market leaders, Europe's Internet giants are turning out to be telephone companies. Former monopolies such as Deutsche Telekom and France Telecom run the Continent's dominant Internet service providers (ISPs), while mobile operators such as Vodafone AirTouch PLC are fast cornering the wireless-Web market. These heavyweights are shopping for smaller companies to expand their content and geographic reach. At the same time, U.S. e-commerce giants such as Amazon.com Inc. and eBay Inc. are moving into Europe, posing a stiff challenge to local startups. Against that backdrop, says analyst Olivier Beauvillain of London's Jupiter Research, ''I don't see how Europ@web can be a leading player in the European Internet economy.'' TOP DOLLAR. Certainly, Arnault can keep spending if he wants to. At 51, he's the richest person in France, with a nearly $19 billion personal fortune. Even in today's depressed conditions, market-watchers figure the value of Europ@web's holdings to be at least $1.8 billion--down from a peak of more than $3 billion earlier this year but still far more than the nearly $500 million Arnault has put in. And he shows no sign of abandoning Europ@web. In early July, Arnault hired a raft of new managers, including several assigned to expand the company's reach into Latin America and Japan. Still, in hindsight, Arnault's push into cyberspace looks ill-timed. Europ@web holds stakes in a grab-bag of 40 companies ranging from upscale e-retailers to music-download sites to nitty-gritty technical-service companies. His plan was to use LibertySurf, a free-subscription ISP that he set up in early 1999 with British retailer Kingfisher, as a funnel to direct subscribers to a range of consumer and business-to-business sites. Because most of his investments were made during last year's tech-stock boom, Arnault paid top dollar. Yet even by then, it was late in the game for newcomers to have a shot at becoming market leaders. Take Aucland, the French auction site Europ@web acquired last fall. The plan was to expand it and use it as the foundation for a network of auction sites across Europe and in Latin America and Asia. In an interview with BUSINESS WEEK in February, Arnault said: ''Within one or two years, we will have the eBay of the rest of the world.'' Yet Aucland hasn't made much of a dent outside France, and even at home it's a distant second to market leader iBazar.com. Meanwhile, eBay is coming on strong in Britain and Germany and is about to enter France. Arnault's plans to create a Europe-wide online bank also proved difficult to execute. Europ@web has invested at least $80 million in the project, dubbed Zebank. It is 20% owned by Belgian bank Dexia and was supposed to go online last April. But its startup has been delayed until at least autumn, while competitors such as Sweden's SEBanken and ING of the Netherlands have jumped in and are rapidly gaining share. Most worrisome is LibertySurf. Modeled on Britain's Freeserve, LibertySurf is marketed through Kingfisher's electronics stores in Britain and France. But instead of serving its intended purpose as a funnel to other Europ@web sites, LibertySurf looks more like a sieve. True, it has more than 1.8 million subscribers. But people tend to use it as a backup, with only half of its subscribers logging on even once a month. That helps explain why LibertySurf shares, listed on the Paris Bourse since March, have dropped over 50% in recent weeks. LibertySurf lost $23 million last year on sales of only $6 million and isn't expected to make a profit until 2003. Arnault may be trying to reposition it. He recently joined a consortium including Luxembourg-based FirstMark Communications and French utility Suez Lyonnais des Eaux in successfully bidding for a national radio license that will let them offer high-speed Net service. Customers, mainly businesses, will get automatic subscriptions to LibertySurf. Europ@web executives say the company is on track. Managing Director Becharat notes that Europ@web's stake in LibertySurf is worth about $1 billion, while Arnault invested only $57 million to start it. He predicts that about a dozen of Europ@web's companies will turn a profit by the end of next year. Investors aren't convinced. Arnault had expected to float Europ@web in July on the Paris and Amsterdam stock exchanges at a valuation of at least $3 billion. But when his bankers at Credit Suisse First Boston put out feelers in early summer, prospective investors weren't impressed. ''I told them that a valuation above 2 billion euros [about $1.8 billion] was not compelling,'' says French fund manager Frederic Buzare. ''They cannot forecast which are winners and losers, so they have decided to invest all along the value chain. It is like a lottery.'' Other investors were spooked by the collapse of Boo.com, a British apparel e-retailer in which Arnault had invested. STILL OPEN. How could Arnault improve Europ@web's prospects? In recent months, he has invested in technology-oriented companies such as Moonfruit, a British company that provides assistance in setting up Web sites, and Quios, a San-Francisco company offering instant-messaging services to mobile-phone operators. Analysts say the market for these services is still relatively open to newcomers. The only Europ@web business that's now profitable is Cassiopee, a French company that helps online merchants operate call centers. Europ@web also is adding more luxury e-retailers, such as Wine & Co. and e-luxury. Indeed, while Europ@web has bumped along, LVMH is flying high. First-half sales were up 40%, and the company expects profits to grow at least 20% this year. That's on top of a record-breaking 1999, in which profits rose 40% and sales jumped 23%, to $8.5 billion. After singlehandedly building LVMH into the world's biggest luxury company, Arnault hardly needed to start a new empire. But the Web's promise intrigued him--just as 16 years ago he was intrigued enough to buy a rundown textile conglomerate because one of its holdings included a faded brand called Christian Dior. ''When I bought Dior and told people we would become No. 1 in the world, no one believed it,'' Arnault told BUSINESS WEEK recently. Who knows--this master of the long shot could still turn out to be a Web winner. But right now, it's looking like a long shot indeed. By Carol Matlack, with Sharon Reier, in Paris _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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