A BEAR BATTLE
American investor Dan Loeb tries to nudge Johann Rupert’s Richemont out of hibernation
Johann Rupert is famously known as Rupert the Bear for his cautious approach to expanding his luxury goods company, Richemont. But now, the bear is being prodded in the rear by a notoriously aggressive activist investor, Dan Loeb, whose vehicle, Third Point, has taken a 1.2% stake in the company, sparking a minor flood of interest in the reclusive business.
Dan Loeb may have taken just a small stake in Johann Rupert’s Richemont, but it’s clear from press reports that he has some support from other investors, who want the bear to stop hibernating and start roaring.
But there are all kinds of ironies here. The first is that Richemont has bounced back hard from the coronavirus slump, and its share price is up almost 50%. That’s more than the sector leader LVMH, which has grown by 35%, and much more than Kering, which owns Gucci, which is up only 12%. It is however less than Hermès, which has been on fire, rising 63% this year, and it lags the sector over a longer term.
The second irony is that unlike many of the companies Third Point has tried to elbow on to a faster growth track in the past, including Yahoo, Sony and Royal Dutch Shell, shareholders have little real power in the case of Richemont since the dual share structure means Rupert has the majority vote despite owning just less than 10% of the company.
The third irony is that despite being known for his bearish stance, Rupert has invested billions into Richemont’s e-commerce unit, Yoox Net-a-Porter (known as YNAP), which is one of the planks of criticism against the company. The unit is losing money – the unit in which it operates lost $258-million last year – and has not delivered on a promised turnaround. To make matters worse, the Financial Times reports YNAP is currently losing ground to new competitors like Farfetch.
And there is an irony within an irony here, because YNAP is one of the leading, perhaps the leading luxury brand websites out there, and it’s been growing strongly over the years. And then there is the irony in the irony in the irony, which is that Richemont recently bought a part of Farfetch.
Isn’t this what you are supposed to do with an online start-up? Spend a fortune to make a fortune and don’t worry too much about the immediate profitability, but focus on becoming the leading brand and let the network effect lift you into the future?
This is the question that Loeb’s intervention might be seeking to answer: shouldn’t Richemont stay out of the IT game, and focus instead on the very lucrative and attractive business of making fabulous Cartier jewellery and Chloé clothes to sell at a vast markup to the world’s increasingly large number of super-rich?
It’s possible, according to the Wall Street Journal, that Loeb might be – knowingly – pushing on an open door. The Journal estimates that without the investment in YNAP, Richemont’s operating margin might be 16.8% rather than the 11.2% at which it currently operates. Investment house Bernstein calculates that if this were the case, Richemont’s shares could be worth 26% more than they are today. Richemont itself must be aware that these losses are not sustainable.
But if Loeb is betting on this kind of quick fix, he really doesn’t know Rupert very well. Rupert takes enormous pride in investing for the long term, which is partly why the share price structure of Richemont is what it is.
Rupert, now 71, has seen off many a pushy investor over the years, and in general, investors do see the logic in being cautious and fastidious with luxury brands. The disdain from Richemont was apparent in its crisp “no comment” to press enquiries on the topic.
Still, the share price of Richemont did rise by 4% on Monday, the day Loeb’s investment became known, suggesting investors are confident some kind of pressure can be brought to bear on the company.
It’s going to be a fascinating battle. BM/DM