Richemont May not Get Big Bump From Sale of its Tobacco Holdings

Source from:  By Astrid Wendlandt and Katie Reid Reuters October 7, 2008 10/08/2008

Richemont will become the second-biggest pure luxury goods specialist in Europe if shareholders back plans Thursday to spin off its stake in British American Tobacco. Its structure as a conglomerate has held down Richemont's share price. But shedding BAT may not raise the company's stock valuation as much as investors may have hoped, because now it is being dragged down by the worsening outlook for the luxury goods industry. "Normally, due to the spinoff, the stock could have expected to see its valuation ratings improve by 10 to 15 percent, but in the current environment, it might not happen," said Claudia Lenz, an analyst at Bank Vontobel in Switzerland. Shares of Richemont, which is based in Geneva, trade at eight to nine times expected 2009 earnings, compared with an average of eight to nine times for the European luxury goods industry - excluding Hermès, which has a price-to-earnings ratio of about 36. Before the summer, when consumer sentiment and economic trends were better, luxury goods multiples were closer to 12 to 14 times. Richemont is at a 30 percent discount to the European luxury leader, LVMH Moët Hennessy Louis Vuitton, and 15 percent to 20 percent lower than the jeweler Bulgari, based on next year's earnings. "Industry and retail interviews that we carried out in the last few days point to a bumpy road to Christmas and confirm weakening luxury sales growth momentum," analysts from Bernstein Research wrote in a report. Richemont's divestment of BAT would make a significant departure from its origins. The company was created in 1988 with the spinoff of international assets owned by the South Africa-based Rembrandt Group, which included interests in the tobacco, gold and diamond mining industries as well as luxury goods investments. The group built up its presence in the luxury market through a series of acquisitions, in particular watch makers like Vacheron Constantin, Jaeger-LeCoultre, International Watch and A.Lange & Söhne. Having shed BAT, one Paris-based analyst said, Richemont's valuation could be weaker and more vulnerable as its investment in tobacco, a less cyclical industry than luxury goods, gave it a cushion during downturns. With high fixed costs and leases, Richemont is able to be less flexible than some peers when demand slows, analysts say. But Richemont's discount to its peers should narrow over time as a larger number of investors will buy its shares because they have to include them to reflect their investment strategy and calculated exposure to pure-play luxury stocks. "Richemont will become more attractive because many investors either could not or did not want to invest in it because of the tobacco stake and the ethical issues linked to that," said Andrea Gerst, fund manager of Julius Baer's luxury brands fund. If Richemont becomes a pure luxury goods group, with brands like Cartier, Montblanc and Van Cleef & Arpels, it could put additional pressure on a French rival, PPR, to spin off its retail arm, Conforama, and become more luxury-focused. Just under half of PPR's valuation is in Gucci, the owner of the fashion houses Yves Saint Laurent and Balenciaga. According to the French brokerage firm Natixis, if PPR sold Conforama for an estimated €2.5 billion, or $3.4 billion, it would add about €10 to its share price, lifting its valuation by some 15 percent. The stock would also trade closer to luxury groups, which are traditionally on higher multiples than retailers. PPR refuses to comment on whether Conforama is for sale or not, but analysts have been encouraging the company to look for buyers for the unit. Richemont, which is controlled by the Rupert family of South Africa, wants to spin off a 30.1 percent stake in BAT that it holds with a South African company, Remgro, via a joint Luxembourg-based vehicle called R&R Holdings. Some 90 percent of the stake will go to shareholders. The rest will be held in a new investment vehicle called Reinet Investments, with assets of just under €2 billion. Enditem