Description

Gucci Group, the global luxury goods company, provides an opportunity for equity holders to earn a relatively safe 8% return over the next year with a free call on the recovery of the luxury sector. GUC previously agreed for common shareholders to sell their shares to current majority owner, Pinault Printemps Redoute (PPR), at a value of US$101.50 in March of 2004. Thus, next year, GUC shareholders should have the option of putting their shares back to PPR at the $101.50 level or holding onto them if valued higher. Below are some of the more salient issues worth considering.

Company description
Gucci Group N.V. is one of the world's leading multi-brand luxury goods companies. Through the Gucci, Yves Saint Laurent, Sergio Rossi, Boucheron, Roger & Gallet, Bottega Veneta, Bédat & Co., Alexander McQueen, Stella McCartney and Balenciaga brands, the Group designs, produces and distributes high-quality personal luxury goods, including ready-to-wear, handbags, luggage, small leather goods, shoes, timepieces, jewelry, ties and scarves, eyewear, perfume, cosmetics and skincare products. The Group directly operates stores in major markets throughout the world and wholesales products through franchise stores, duty-free boutiques and leading department and specialty stores. The shares of Gucci Group N.V. are listed on the New York Stock Exchange and on the Euronext Amsterdam Stock Exchange.

PPR buy-out summary
PPR served as a white knight during LVMH’s hostile bid for GUC from 1999 to 2001, striking a deal to buy out common shareholders in GUC at $101.50 at March 2004 – a value of about $4 billion. In terms of the legal aspects, it appears that the purchase contract is tight – PPR does not appear to have a legitimate path to extricate itself from the deal, if it so desired. Indeed, PPR proceeded to culminate the purchase agreement through the chaos of 9/11. Strategically, it appears that PPR does not want to get out of the deal, since PPR has decided to streamline its business focus toward becoming a luxury-oriented retailer and GUC is a truly unique set of brands and assets – which it fought so hard to win. Indeed, PPR currently owns almost 60% of GUC. Finally, from a credit perspective, while PPR has maintained significant leverage, the company is in the process of divesting major assets to generate sufficient cash to cover the GUC buy-out next year. Indeed, Credit Agricole just closed this week on its 1.5 billion euro purchase of 61% of finance subsidiary Finaref, for which it has agreed to buy an additional 29% in early 2004 for over 700 million euros. PPR has also sold its Facet finance business for another $1 billion as well as its Guilbert mail-order business. If need be, PPR could also sell other significant and non-strategic businesses to generate extra cash.

It is worth noting that GUC itself has significant cash on its balance sheet (about $3 billion) to which PPR will have access, and GUC could be re-floated by PPR to raise additional cash after the buyout. Additionally, GUC has been actively buying back shares with its excess cash to reduce the float, while PPR has also been increasing its already sizeable stake. GUC shares are being bought by both companies on the NYSE and Amsterdam exchange at pre-determined levels (on even calendar days) – indeed, PPR notified the SEC of purchases at current levels just this past week. According to the company agreements, PPR can increase its stake in GUC up to 70%. PPR is due to present earnings in Paris on March 5.

Gucci outlook
As most people are aware, the history of Gucci has been both exciting and volatile, enduring a great rise and fall in the fashion and business worlds over the past few decades, culminating in the current resurgence in recent years under CEO Domenico de Sole and chief designer Tom Ford. The current operating environment is, unsurprisingly, weak due to the global recession.

While GUC currently trades at a clear premium to luxury goods comparables, supported by the buyout plan, there exists the possibility that the luxury sector could recover over the next year with an improving world economy. Also, GUC earnings are currently dragged down by its investment in rebuilding the YSL brand (and some other smaller brands) which is increasingly valuable but reflected as losses in earnings. Further, the multi-brand strategy is designed to allow future growth while reducing dependence on the specific Gucci brand.

Catalyst

Catalysts:
*PPR buy-out at $101.50 planned for spring 2004
*Share purchases by PPR continue on the open market, increasing its 60% stake before buy-out
*Share buyback by Gucci continues, employing its sizeable cash balance
*Potential recovery in luxury goods company fundamentals and valuation