Global Economics

Scent of a Bargain for European Tycoons


With few luxury options left to snap up, homegrown moguls are increasingly looking downmarket for the Continent's undervalued companies

What does luxury king Bernard Arnault see in discount stores? Arnault, the boss of LVMH Mo?t Hennessy Louis Vuitton, disclosed on Mar. 7 that he had teamed up with U.S. investment group Colony Capital to buy nearly 10% of Paris-based Carrefour, the global No. 2 discount retailer after Wal-Mart (WMT). News of the $4.5 billion purchase broke on the same day Carrefour Chairman Luc Vandevelde was ousted in a dispute with France's Halley family, Carrefour's biggest shareholder (with a 20% voting stake).

Naturally, that triggered speculation Arnault could be eyeing a takeover of Carrefour. He and his partners have said nothing beyond a terse statement describing the deal as "a long-term strategic and industrial investment," and sources close to Arnault say he has not ruled out buying a larger stake.

Most analysts, though, think he will stop short of a takeover and instead seek board representation to press the company to sell off some of its real estate portfolio. Carrefour Chief Executive Officer Jos? Luis Duran??ho is expected to keep his job??aid during a Mar. 8 conference call that real estate disposals "could be a vector for creating wealth for shareholders."

Building Their Empires

The deal underscores the increasing visibility of homegrown moguls in Europe's red-hot private equity scene. In February, Arnault plunked down $370 million to buy GO Voyages, an online travel company, from French hotel chain Accor. He's also joined Belgian tycoon Albert Fr??re??ith whom he co-owns a Bordeaux winery??n setting up a $1.3 billion private equity fund that's now scouting for investments in European companies.

Separately, Fr??re recently amassed a 16% stake in Paris-based building-materials giant Lafarge (LR). And Fran??ois Pinault, the billionaire founder of French retail and luxury group PPR, recently bought a chunk of Paris-based construction group Vinci, and briefly considered a bid for French utility group Suez (SZE) as well.

It's no surprise these guys are shopping. Europe has a bountiful supply of companies with undervalued shares, as well as privately held businesses long overdue for restructuring. That's why U.S. and European buyout firms are pouring record investments into the region, despite emerging signs of popular resistance (see BusinessWeek.com, 3/1/07, "A Backlash Against Private Equity").

Life of Luxury

Europe's tycoons have very deep pockets, too. Arnault, for example, is the world's seventh-richest person, with an estimated net worth of $21 billion, mostly from his 47.5% stake in LVMH, the world's biggest luxury conglomerate.

But why is a guy who peddles champagne and haute couture investing in superstores and travel agencies? After all, the luxury business is thriving. On Mar. 8, PPR reported that 2006 profits were up 28%, to $899 million on sales of $23.5 billion, propelled by strong growth in its luxury business. LVMH on Feb. 14 reported a 16% jump in profits, to $4.2 billion on $19.7 billion in sales.

Short answer: Even if business is booming, there aren't many dealmaking opportunities left in luxury these days. Over the past decade, LVMH and PPR, whose brands include Gucci and Yves St. Laurent, have snapped up dozens of smaller luxury houses. Nowadays, only a few tempting targets remain??otably France's Herm??s and Italy's Giorgio Armani??nd their owners don't seem interested in selling.

At a Discount

By contrast, there is plenty of low-hanging fruit elsewhere. Take Carrefour. Its shares have lost more than one-third of their value since 2000, as the retailer has struggled against bare-bones discounters in Europe while trying to expand in China and other emerging markets. The company has started to rebound under CEO Duran, who has slashed prices while jettisoning poor-performing units in countries such as South Korea. On Mar. 8, the retailer reported a 58% profit increase, to $2.9 billion, on $102 billion in sales.

To unlock more value, Arnault and Colony are likely to push for disposal of some of Carrefour's extensive real estate holdings, worth more than $20 billion. Colony, a California investment group specializing in real estate, has pursued a similar strategy at hotel group Accor, where it picked up a board seat after investing $1.2 billion in the company in 2004. In the past two months alone, Accor has sold more than $2 billion worth of property in Europe, taking advantage of high real estate prices to raise cash for investment in hotel operations.

Mass retailing may lack the allure of the luxury business. But for Arnault and his fellow tycoons, the scent of money will more than compensate.

Matlack is BusinessWeek's Paris bureau chief.

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