Feature

The Luxury Wars

At 8:30 a.m. on March 19, Arnault was presiding over a meeting of his company's top executives at EuroDisney, near Paris. He expected to meet again with De Sole at 10:30 a.m., in an effort to jump-start their talks. Instead, he received word that De Sole had launched a new surprise defense, signing an agreement to sell a 40 percent stake in Gucci to François Pinault, a French financier and department-store mogul, for about $3 billion, or about $75 a share -- $10 a share below what De Sole wanted from Arnault.

The deal diluted LVMH's stake in Gucci by nearly half, removing his leverage over its future. Under the terms of the deal, Pinault will eventually name three out of five members of a new committee with veto power over any potential mergers or acquisitions, which Arnault says amounts to control. "It is stupefying," Arnault says. "This is exactly the opposite of what De Sole said he wanted! Now we have no choice but to protect our investment."

Immediately, Arnault reversed himself and made a bid for all of Gucci's outstanding shares, eventually offering as much as $91 a share, under certain conditions. But success is unlikely because of Pinault's big stake. "Pinault is the one who is making a creeping takeover; that is his maneuver. We are on the side of minority shareholders here!" Arnault says.

And Arnault tacked a new charge onto his claims against De Sole in Dutch court: that Gucci betrayed its shareholders by locking up control for a fire-sale price. A shareholders' rights group has backed him up. And at least one U.S. investment fund has written Arnault a letter siding with him as well.

De Sole, though, insists that Arnault hasn't made a legitimate offer, because the board can't meet Arnault's conditions, which include making Ford stick around. "That is laughable," De Sole says. "We cannot speak for Mr. Ford!"

In fact, De Sole claims, the only reason Arnault made his "alleged offers" is that he is afraid of the competition. De Sole doubted the efficiency of Arnault's luxury conglomerate, but now he is excited about building his own. "We can really become an important player as a luxury conglomerate," he says. "In fact, it was our plan to buy some new brands all along."

That was Pinault's plan, too, says Serge Weinberg, chairman of Pinault's department-store company Pinault-Printemps-Redoute. "We plan to make Gucci our platform to consolidate luxury brands, with De Sole as CEO." And, he says, they intend to start shopping for new brands right away. "We didn't just invest $3 billion in Gucci to put it in the bank," he says.

To begin with, Gucci will have a chance to buy a portfolio of brands Pinault just acquired from the drug company Sanofi; a host of additional brands, including Yves Saint Laurent; and the Fendi, Oscar de la Renta, Van Cleef & Arpels, Roger & Gallet, and Krizia perfumes.

Ford will be in charge creatively. "Ford has demonstrated a very wide understanding of how to translate a very consistent brand image across a wide range of products," Weinberg says, "But his talent will also help in asking other talents to join."

Their ideas sound very much like Arnault's: Rising marketing and distribution costs make it hard for smaller firms to compete, creating an opportunity to consolidate design "boutiques" into a brand-new conglomerate. Until now, Weinberg says, smaller luxury companies had only one potential buyer when they wanted to sell. "Now they will have two," he says.

On Thursday, April 22, Arnault faces what may be his last chance to buy Gucci: a ruling by the Dutch court on his charges against De Sole. But a defeat still wouldn't mean the saga is over. Arnault still has a substantial minority stake, and people who know him say he is unlikely to walk away empty-handed. Two years ago, for example, he was a major shareholder in Guinness when the company announced a plan to merge with the U.S. snacks-and-fast-food giant Grand Met. He held up the talks for months by advancing his own plan for a three-way deal with Moët-Hennessy to form a giant "Drinksco." Finally, at a meeting with the top executives of both companies in a private plane at London's Northolt airport, Arnault offered a compromise solution. He accepted a $375 million payment to let the deal go through.

So Arnault may not get what he wants. But Gucci's escape, too, may have a high price.