The Billionaire Who Wasn't (33 page)

CHAPTER 22

The French Connection

The travel business recovered quickly after the end of the Gulf War, and Atlantic Foundation's share of the cash dividends from DFS improved to $57 million in 1993 and $120 million in 1994. But the painful experience of reneging on charitable pledges convinced Feeney more than ever that the time had come to sell his holding in the company to put the philanthropy on a more reliable basis. “I wanted to make sure that we could see a long-term flow of money for our charitable giving,” he said.

“We knew that we had a huge asset which was completely illiquid and nondiversified, so we had the worst portfolio you could possibly have,” recalled Dale, who estimated in his 1994 president's report that Atlantic Foundation's assets were worth $2 billion, $1 billion represented by the stake in DFS and $500,000 each in the businesses and the investment portfolio. “DFS could have gone into bankruptcy, or we could have another year without dividends. Who knows? Life's complicated. We had known for years that a sale was very desirable. It became much more clear in the pain of the closing down of the dividend at the time of the Gulf War. We just couldn't keep punishing our beneficiaries in that way. We needed to exit at some juncture.”

Feeney was also convinced that DFS was a mature business, and it was time to sell for business reasons alone. New patterns in tourism worried
him. “At one time I could stand at the airport and tell you if I saw 100 Japanese come in what was the average spend,” he said. “Then all of a sudden they started showing up in tattered shorts and all that, and I said—these aren't the same Japanese that we sold to all these years.”

The changing trends were most obvious in the DFS stores in Hawaii. John Reed observed that value had replaced status in the Japanese market, and the new Japanese tourists had less disposable income than those who propelled DFS sales in the early days. “They have become younger, less affluent, more demanding and unmindful of the gift-giving and other traditions that bound their predecessors,” Reed told
Pacific Business News.
There were no longer any shortages in Tokyo, and the prices in Japan had gone down. The decline of the Japanese yen against the dollar and credit restrictions in Japan also drove down spending levels. Japanese tourists were more inclined to buy single items for their own consumption.

After stepping down as DFS chief executive in January 1995, Adrian Bellamy, in a confidential report he wrote for his successor, Myron E. Ullman, offered a similar downbeat assessment. DFS was a huge financial success, and it had the most effective marketing system in the world, but there were ominous portents, he warned. There were tough times ahead for the concessions on which the business relied. The historic formula of escorting Japanese tourists straight to DFS stores was looking jaded as travelers from Japan were becoming more independent. Items sold at DFS stores offered customers substantial savings but not because DFS paid no duty—this was eaten up by concession fees—but because of the vast difference between home market prices in Japan, Korea, Taiwan, and elsewhere, versus DFS prices. This was due to the inefficiency of the distribution structures in those countries. “Unfortunately for us this unique advantage which we conveniently tucked under the banner of duty free is fast collapsing.” It had collapsed in liquor in 1987, was now collapsing in cosmetics and perfume, and there would be global prices in a 10-percent range by the end of the 1990s. Bellamy added that DFS was too decentralized, that if it did not modernize it would be “soundly beaten by competition”; that in Hong Kong the shops were shoddy and an embarrassment to vendors; that DFS was “great in our paternalism but not in our empowerment”; and that if the management system of “kick ass and take notes” did not change, they were in trouble.

Bellamy also advised his successor that DFS was “truly somewhat arrogant” with customers in the way it got staff to push Camus cognac. He
claimed the DFS-owned distribution company, Camus Overseas Ltd. was dysfunctional and “we are dealing with a very, very sick category of merchandise which doesn't seem to me to have much upside.” The outgoing chief executive had never been happy with the Camus arrangement, which was managed by Jean Gentzbourger from 1972 until 1985—when he had stepped down and sold his shareholding for $3.6 million—and which he took over again in 1992 after his successor had left. Gentzbourger calculated that over a period of twenty-five years, the Camus arrangement on its own made between $600 to $700 million in dividends for the four DFS owners. The dividends were diminishing, however, as the purchase obligations were becoming more onerous compared to the opportunity for sales, and the partners were becoming increasingly unhappy with the way Michel Camus's successors were doing business.

Nonetheless, DFS was still perceived as a phenomenal success story, and in the early 1990s there was no shortage of suitors. “We would get a letter every three months saying, ‘Gee, you people have a wonderful business, and we'd like to talk to you about buying it,'” said Feeney. “They would say in a letter, ‘Let's put something together.' When you talked to them they would say, ‘Here's how we will do it. We will give you 10 percent and pay the rest later.' It doesn't work that way, folks. So depending on the letterhead, we would get back and say, ‘Well, it is a good business and we've been operating it for a long time, and by the way it's a cash transaction, and the cash involved would be $3 or $4 billion dollars.' That chased away the walkers, talkers, and gawkers.”

Then in July 1994, Harvey Dale got a call in his New York office from an old acquaintance, George T. Lowy, a partner in Cravath, Swaine & Moore, one of the law firms Feeney used. Lowy had contacts in Paris and spoke fluent French. “I have somebody who might be interested in buying DFS,” Lowy said. He couldn't give a name but asked, “Would you be interested in talking?” “You will have to get permission to give me the name, and I will have to go and talk to Chuck and we will respond,” replied Dale. Lowy called back the next day. His informant was the chairman of Lazard, the New York and Paris-based investment banking firm that specialized in mergers and acquisitions. Lazard managing partner Antoine Bernheim was a personal friend and patron of Bernard Arnault, the head of Louis Vuitton Moët Hennessy in Paris; he boasted once that he carried Arnault “to the baptismal font of finance.”

Dale knew immediately that if LVMH was behind the approach, it was serious. With annual sales of nearly $6 billion, the huge Paris-based company was perhaps the only retailer in the world at that time that could buy the duty-free business outright for cash. Arnault, then forty-five and on his way to becoming one of the world's richest people, had taken over LVMH after the merger of Louis Vuitton and Moët Hennessy. In a bitter power struggle four years earlier, he had ousted Henri Racamier, the former chairman of Louis Vuitton, to gain absolute control. He was in the process of building an empire of high-end brands that already included Louis Vuitton, Christian Dior, Givenchy, Celine, Christian Lacroix, Kenzo, Loewe, Fred, Veuve Clicquot Ponsardin, Hennessy, Moët & Chandon, Dom Pérignon, and Pommery. He had also acquired a famous department store, Le Bon Marché.

He had, it emerged later, been eyeing DFS for some years. He liked the potential synergy of acquiring DFS's network of 180 stores. LVMH was the biggest supplier of designer goods to DFS. Arnault was also seeking to expand into Asia, the source of the world's new money, where DFS was already entrenched.

Feeney was intrigued. On August 10, 1994, he and his legal counsel Chris Oechsli flew from London to Paris and took a taxi to Avenue Montaigne, the tree-lined boulevard off the Avenue des Champs-Élysées lined by the elegant fashion houses of Gucci, Jill Sander, Chanel, Chloé, Celine, Escada, and many other brand leaders. Arnault greeted his visitors in a reception room at Dior headquarters at 30 Avenue Montaigne, furnished with large white couches and a portrait of Christian Dior. They spoke in French. Feeney thought the slender Frenchman with elf-like features was a gentleman. They related well. The two had a lot in common. Both dressed modestly and avoided the limelight. Neither liked attending celebrity events. They were obsessive about the detail of retailing. Feeney was known to check if there was ink in the display pens in DFS stores, and Arnault was once able to tell that Givenchy's cosmetic counter in a New York store had expanded by a couple of feet at the expense of a sister company since his previous visit.

Feeney was elliptical with Arnault except on one point. “We are not talking about trading paper, we are talking about cash, serious cash,” he said. The French fashion magnate did not blink. He asked for some financial information to put a price on DFS equity. Feeney told him that sales had
reached $3 billion a year. They parted with an undertaking to begin negotiations for Arnault to buy a portion of Feeney's shareholding in DFS as a first step. After the flight back to London, Feeney told Oechsli, “I want you to run with this.”

“Chuck was open to a lot of angles,” recalled Oechsli. “He did not give the impression that he was thinking: Here is an opportunity to divest. Quite the opposite. His tactic was: First we will let you see some rough information, just a sense of what's there, but we don't want to give you too much because we are concerned about exposure to our partners and what they can see.”

Arnault discussed Feeney's visit with his confidant, Robert Leon, when they met for their ritual Saturday morning coffee in a Paris café. There were better uses for LVMH's cash, suggested Leon. But Arnault was attracted to the idea of buying into the first truly successful global retailer. The duty-free business absorbed 20 percent of the production of the French luxury market, and the more he controlled distribution, the more he was master of his own fate.

The following month, Arnault and Feeney entered into formal negotiations for LVMH to buy 8.5 percent of DFS as a first step to possibly acquiring the whole company. It was small enough not to tilt the balance among the four shareholders, but big enough to allow Arnault to come in and participate in the business.

Feeney contacted the others to tell them what he was doing. “I think we have an opportunity to sell now, I think we should do so,” he told Bob Miller. “This is a live one. This is someone who will look you in the eye and say we are not talking about trading paper, we are talking about cash, about serious cash.” Miller replied, “That's interesting. I wonder what they have in mind.” He was, however, deeply troubled. He recalled thinking, “DFS is our baby: I was concerned about his [Arnault's] reputation and that he might buy our company and then just ‘flip' it. Would he destroy the company or sell it on?” Arnault had a reputation as a corporate raider. Pierre Bergé of Yves Saint Laurent once described him as a “bird of prey.” His “cold stare” was described in a
Forbes
magazine article as rivaling that of the old widow Clicquot on the label of Champagne Veuve Clicquot.

Feeney sought out Tony Pilaro in an investment office his partner had established in Dublin. “He sat right here,” said Pilaro in a high-ceilinged room lined with bound DFS records. “He said, ‘I'm selling 8.5 percent of my interest to LVMH.' He wanted my backing and support.” Pilaro subsequently
called Harvey Dale and, according to Dale, told him “with great excitement” that he thought a sale to LVMH would be lucrative to the four shareholders and increase DFS's revenues substantially. His enthusiasm stemmed from an assumption that Arnault would at last allow DFS to sell its most expensive top-of-the-line merchandise. LVMH's largest retailer, Louis Vuitton, sold its luxury leather goods only through Louis Vuitton stores. If LVMH bought DFS and ended the ban, it could boost DFS annual sales by an estimated $150 million a year.

Miller, Pilaro, and Parker asked for a face-to-face meeting with Arnault to see what he had in mind. The three non-Feeney owners took their turn on the white divans of Arnault's reception room in Paris on October 13, 1994. The following day, Pilaro wrote to Arnault, saying that the synergies between LVMH and DFS were obvious and his effort to buy a minority stake “warranted serious consideration by all parties.” But he added, “The price will have to be compelling.” He made clear that their agreement to Chuck selling 8.5 percent of the equity would depend on LVMH allowing DFS to sell Louis Vuitton merchandise. Arnault would not accept such a condition and did not bother to reply. On January 23, 1995, Pilaro wrote again to the LVMH chairman. This time he said that he, Miller, and Parker had no interest in selling any of their holdings to LVMH.

Six months passed, with Chris Oechsli and Jim Downey commuting back and forth to Paris to negotiate with the LVMH lawyers before Feeney formally proposed, on July 20, 1995, selling Arnault an 8.5-percent interest in DFS, as a first step in acquiring Feeney's total shareholding, assuming a capital value for DFS of $3.5 billion. It was another four months before Arnault responded. On November 13, 1995, he accepted the two-step purchase deal, while indicating his desire to buy up the other shareholders' interests in DFS. Two weeks later, on November 29, Feeney wrote to his co-owners, informing them of the agreement and of his view that not only was LVMH the only company capable of buying DFS but that Arnault was willing to go all the way. He disclosed that he had obtained assurances from Arnault that he would respect and maintain an “arm's-length commercial relationship” between LVMH's subsidiaries and DFS.

Pilaro wrote to Feeney, saying he and Parker would meet Arnault again in Paris on January 9, 1996, and that he would inform him that the other shareholders were willing to consider an offer for all their equity in DFS, but only if the price was higher than the suggested $3.5 billion capitalization.
Their primary objective, Pilaro said, was “to extract the highest possible price for the company.” The meeting with Arnault did not go well.