Compagnie Financière Richemont AG

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Compagnie Financière Richemont AG

Rigistrasse 2
6300 Zug
Switzerland
Telephone: + 41 (0) 41-710-3322
Fax: +41 (0) 41-711-7102
Web site:http://www.richemont.com

Public Company
Incorporated:
Employees: 10385 (2002)
Sales: $3.75 billion (2002)
Stock Exchanges: London Switzerland
Ticker Symbol: RIT (London), CFR (Switzerland)
NAIC: 551112 Offices of Other Holding Companies; 316993 Personal Leather Goods (Except Women’s Handbag and Purse Manufacturing); 334518 Watch, Clock, and Part Manufacturing; 339911 Jewelry (Except Costume) Manufacturing; 448310 Jewelry Stores; 316992 Women’s Handbag and Purse Manufacturing; 312221 Cigarette Manufacturing

Created as a holding company for the Rupert family’s international interests, Compagnie Financière Richemont AG (Richemont) has grown into a world-famous global luxury goods company. The company owns many of the brands that do much to define the word luxury: Cartier, Jaeger Le Coultre, Piaget, Baume & Mercier, Vacheron Constantin, A. Lange Sohne, Officine Panerai, Chloé and Lancel. Richemont also owns 80 percent of the jewelry maker Van Cleef & Arpels. When Richemont merged Rothmans International, its tobacco unit, with British American Tobacco (BAT) in 1999, they received 35 percent ownership of BAT. Richemont is controlled by the Rupert family, with Johann Rupert directing the family’s interests. The company has also dabbled in businesses outside of the luxury sphere, including stakes in French television company Canal + and U.S. catalog company Hanover Direct, but continues to focus its attention on the luxury market.

A South African Family Business

Richemont was created in 1988 when the Rupert family decided to spin off the international assets from their core company, Rembrandt Group Ltd. The Rembrandt Group was founded by Anton Rupert to manufacture cigarettes in South Africa. Shortly after World War II, the Rembrandt Group began licensing cigarette brands from the Rothmans, the long-established English tobacconist. During the 1950s, Rupert built upon his relationship with Rothmans and began investing in the company. Over time, Rothmans gained additional footholds in the cigarette market by taking stakes in Dunhill and Cartier.

Anton Rupert’s son, Johann Rupert, was handed the reins to the newly formed Richemont after he had gained professional experience outside of the family business. After college Johann Rupert worked in New York at Chase Manhattan and Lazard Feres before returning to South Africa to run his own merchant bank. Johann Rupert ran Richemont with a hands-off style. He believed strongly in allowing his luxury brands the money and time that they would need to develop and blossom into moneymakers, rather than expecting them to perform immediately. In order to support Johann Rupert’s approach, it was necessary for Richemont to carry a large amount of cash on hand. In 1989, Richemont’s purchase of Philip Morris Company’s 24-percent stake in Rothmans, secured control of Rothmans International for the Rupert family. At the time of Richemont’s investment into Rothmans, the company cash reserves were listed at $750 million, with the annual flow estimated at approximately $500 million a year.

Early 1990s: Divide, Merge, and Acquire

In 1992, Richemont announced losses attributed to a variety of currency fluctuations, including a decline in interest income and the fluctuation of the pound. Johann Rupert was not concerned by these losses of profits; instead he reiterated the importance of fiscal patience, stating, “Richemont’s strength, however, lies in its ability to take a long-term view, as demonstrated by its recent investment in new businesses, notwithstanding their adverse effect on short-term profitability.” Johann Rupert focused his attention on a short-term view of his own when, in 1993, he announced his intention to split Richemont’s tobacco and luxury goods interests into two separate companies, merging Cartier and Dunhill Holdings PLC to create a luxury goods group called Vendome. The company said in a statement, “The reorganization would produce two focused groups. The separate managements would be able to respond more effectively to the major changes facing the tobacco and luxury goods industries by concentrating exclusively on their field of business expertise.” The company also said, “The new group [Vendome] will be in a strong position to make the additional investment necessary to maximize brand control and further improve profitability, develop new markets, and make acquisitions as the industry is rationalized and consolidated.”

After a short period of time, during which there was a question of whether the Dunhill’s minority shareholders would block the proposed merger because of the higher valuation that the merger placed on Cartier over Dunhill, the merger was approved and the new entity was named Vendome Luxury Group. In addition to Cartier and Dunhill, Vendome included many of the world’s most well-known luxury brands: Chloé, Karl Lagerfeld, Piaget, Baume & Mercier, and Mont Blanc. Joseph Kanoi, who had been head of Cartier, became chairman and chief executive of Vendome; while Lord Charles Duoro, longtime chairman of Dunhill became deputy chairman. Richemont hoped that by merging these two groups, Vendome management could cut costs by developing an integrated system for distribution and purchasing.

Vendome’s operations were organized into two independently managed groups, Vendome SA and Vendome PLC. Vendome SA was based in Paris and included Cartier, Chloe, Karl Lagerfeld, Sulka men’s wear, Mont Blanc, Baume & Mercier, and Piaget. Vendome PLC was based in London and included Alfred Dunhill and Hackett men’s wear. Richemont emerged from the merger as the owner of 70 percent of Vendome. Existing public Rothmans’ shareholders owned 18 percent of Vendome, while existing shareholders of Dunhill owned 8 percent. The remainder of the Vendome shares was held by companies associated with Luxco (Vendome’s holding company). In 1995, Richemont’s desire to operate Vendome with complete control became reality when Richemont bought out Rothmans International’s minority shareholders. In 1996, the company’s interests continued to expand when Richemont’s television subsidiary NetHold (which was formed the year before) merged with France’s Canal +.

Late 1990s: Stock Buybach and BAT Merger

Joahnn Rupert’s theory that luxury brands need the freedom to operate on a long-term schedule was the impetus behind Richemont’s plan to buy back the 30 percent of Vendome Luxury Group that it did not already own. “When we had total family control of Cartier we were able to give management a much longer time horizon for brand support,” Johann Rupert said. “By taking Vendome private it means that over the next three, five or 10 years it will be easier for management to be less concerned with earnings per share on a six-month basis and more concerned with three- or five-year plans.” Richemont offered to buy the 30 percent at a premium, but warned that the company may not proceed with their bid “in the event of any further collapse in the world markets, which would be likely to have a material adverse impact on the business of Vendome.” In 1997, the board of Vendome agreed to Richemont’s bid. Upon completion of the buyout in 1998, Richmont followed through with plans to take Vendome private. Vendome, valued at $5.74 billion, became free of stock market pressures.

In the same year, Vendome experienced an 8.5 percent drop in profits. The company chalked up the low sales of luxury products to Asia’s economic turmoil. Richemont’s tobacco interests continued to perform well, however, as they managed to avoid the bulk of the legal problems that cigarette companies in America underwent during this same time period. Richemont’s tobacco interests accounted for 75 percent of the company’s $1.7 billion in fiscal profits.

Rothmans International and British American Tobacco—the world’s fourth and second largest international global cigarette companies—announced in 1999 that they intended to come together in a $21 billion merger. The two companies had a combined sales volume of 900 billion cigarettes in 1997. The merged group resulted in the two companies retaining the BAT name, and with Richemont and Rembrandt owning a 35 percent share. BAT Chairman Martin Broughton said, “This merger represents a major step forward in the achievement of our vision to become the world’s leading international tobacco company.” He added that the merger would enable them [BAT] “to play to our proven strengths in maintaining a portfolio of brands, while shifting resources to the premium international brands sector, which enjoys higher margins.” The merged group owned many popular cigarette brands, including Lucky Strike, Peter Stuyvesant, Benson & Hedges, Dunhill, and Rothmans.

Company Perspectives:

In the luxury world more than elsewhere, the ultimate condition for success lies in a company’s capability to reinvent itself and to entrust new generations with its own heritage. A luxury brand is an expression of a lifestyle, in line with its time while anticipating trends. Like an artist, a strong luxury brand is a living being, which must create and innovate to become eternal. Today, the luxury way of life has become an integral part of the modern society, conveying a feeling of exclusivity.

In the fine watch sector, jewelry, accessories and fashion, Richemont has compelled recognition by the targeting of its portfolio brands. Whether they are linked to privilege and patrimony or associated with the idea of elegance and distinction, our brands impose themselves as essential brands in their respective field of expertise.

At the very heart of the beauty of each of our products, a whole array of know-how is apparent, each the outcome of dreams and creativity. As history and traditions nourish our brands’ identities, our strength is that we do not live for only the moment.

Van Cleef Acquisition and Company Reorganization

In 1999, in addition to merging Rothmans with BAT, Richemont acquired a 60 percent interest in Van Cleef & Arpels, the prestige jewelry house. Arpel family members held onto 20 percent of the remaining interest, while the remaining 20 percent belonged to Fingen SpA, a holding company owned by Marcello and Corrado Fratini. The Fratinis had announced their intention to purchase all of Van Cleef in 1998. When asked why they chose to bring in partners, Fabio Cavana, a general manager of Fingen, said, “It was a golden opportunity. Originally, the takeover was going to be leveraged. Then Richemont approached us with money and management skills that we could not turn down. We could not have asked for better partners.” Richemont kept Van Cleef operations separate from its Vendome Luxury Group, continuing with the company practice of keeping their many brands separate and distinct.

After the company had completed its round of acquisitions and mergers it became necessary, during 1999 and 2000, for Richemont and Vendome to undergo staff reorganization to account for new responsibilities. Joseph Kanoi, who spent more than 25 years as chairman and chief executive of Vendome Luxury Group, retired on January 1, 2000 and was replaced with Johann Rupert. Alain Dominique Perrin was appointed senior executive director of Richemont, removing him from his position at Vendome, where he had similar responsibilities to those he undertook at Vendome. Perrin was made responsible for the development and implementation of all of Richemont’s marketing, manufacturing, and strategic operations. Along with Johann Rupert’s move to Vendome’s Geneva offices came many of his past responsibilities, including the responsibility for providing and coordinating several central functions across all of Richemont’s companies. Callum Barton, who had been the director of Alfred Dunhill, was moved from London to Geneva to be operations director of Richemont.

The New Millennium: Additional Acquisitions

Richemont continued its practice of acquiring luxury brands when the company joined forces with Audemars Piguet in 2000 in order to purchase the much sought-after Stern Group. The Stern Group was the leading manufacturer and supplied much of the world’s luxury watch brands with watch dials. Prominent luxury brands The Swatch Group, LVMH Moet Hennessy Louis Vuitton, the Gucci Group, and Waterford Wedgwood PLC had competed with Richemont for the purchase of the Stern Group.

Another important Richemont acquisition that occurred in 2000 was the purchase of Les Manufactures Hologeres (LMH). LMH was the watch-making division of Mannesmann AG. The $1.57 billion purchase included 60 percent of Jaeger LeCoultre, 100 percent of IWC and 90 percent of A. Lange Sohne. The acquirement of the remaining 60 percent of Jaeger LeCoultre rounded Richemont up to 100 percent ownership of the company. The acquisition of Stern Group and LMH bolstered Richemont’s manufacturing capabilities. Richemont also acquired Montegrappa of Italy, a niche watch brand, in early 2000.

The Richemont brands did well in 2000. The company announced a 69 percent growth in after-tax profits, and a 32.1 percent rise in sales in the first half of the year. This same year, Richemont exited the pay-television and electronic media market with the disposal of their holdings in Vivendi (which they acquired in 1999 when they exchanged their Canal + interest for a 2.9 percent interest in Vivendi), the satellite television company.

The Highs and Lows of 2001

Throughout the beginning months of 2001, Richemont was flying high. The company underwent another management restructuring due to influx of new management from their recent acquisitions. In keeping with Richemont’s desire to keep its brands separate and independent from each other, the company released a statement asserting, “The structure will insure that the various ‘Maisons’ maintain their separate, vertical autonomy and produce integrity whilst obtaining maximum synergistic benefits from this important strategic acquisition.” The company also increased their ownership stake in Van Cleef & Arpels when it purchased Fingen SpA’s 20 percent share.

In June of 2001, Richemont announced another large profit leap, and focused much of their enthusiasm for the coming year’s success around the growing market for luxury goods in the United States. While Rupert made hopeful statements celebrating the leap in the U.S. market, he maintained his characteristic speculation about the future of the world’s economic health. “We run this group as if something bad is going to happen,” Rupert said. “If it doesn’t we will do very, very well. But if its does, we will survive.” Rupert was wise to have maintained a skeptical attitude about the world’s financial future, as the terrorist attack of September 11, 2001 in the United States shook the global market and Richemont’s profits plummeted 78 percent.

Key Dates:

1988:: The oversees assets of the Rupert family’s South African company, Rembrandt Group Ltd, are spun off to form Compagnie Financière Richemont AG.
1993:: Richemont’s luxury goods and tobacco operations separate into Vendome Luxury Group and Rothmans International BV/PLC.
1995:: Richemont gains control of Rothmans International with the buyout of Rothmans’ minority shareholders; and Richemont forms a pay-television subsidiary called NetHold.
1996:: NetHold merges with France’s Canal+ .
1998:: Richemont takes 100 percent control of Vendome Luxury Group with buyout of Vendome’s minority shareholders.
1999:: Rothmans International merges with British American Tobacco (BAT); and Richemont acquires 60 percent of Van Cleef & Arpels.
2000:: Richemont joins forces with Audemars Piguet to purchase the watch manufacturer Stern Group; and purchases the watchmaking Les Manufactures Hologeres (LMH).

Immediately after September 11, Richemont issued a warning that its first-half operating profits, stating that the tragedy in New York could exacerbate the company’s profit downturn. “The tragic events of recent days have clearly thrown the world into turmoil,” Johann Rupert said. “This will increase the uncertainties already prevailing in economies worldwide such that short-term forecasting has become difficult.” Richemont followed their initial profit warning, with a statement issued in late October stating, ‘ The positive sales trend seen over the first 10 days of the month was reversed such that, on a like-for-like basis, sales for the month of September as a whole decreased by some 13 percent.” Richemont was not the only luxury goods company issuing dire statements; similar statements were issued by LVMH and Gucci.

At the end of 2001, Richemont released figures that supported the company’s prediction that sales would not be as glorious as they had been previous to September 11. The company reported that their net profits plummeted 78 percent. However, the company’s stake in BAT continued to work its magic, keeping the company awash in funds. Johann Rupert noted that the company had a “good cash flow” from its interest in BAT and that in the first six months of 2001, that investment generated $200 million in dividends. This “good cash flow” allowed Johann Rupert to continue with his practice of taking the pressure off of his luxury brands to allow them to creatively develop in their own time.

Principal Subsidiaries

Carrier SA (France); Chloé International SA (France); Lancel SA (France); Van Cleef & Arpels France SA (80%); Richemont Northern Europe GmbH (Germany); Lange Uhren GmbH (Germany; 90%); Richemont (Asia Pacific) Limited (Hong Kong); Richemont Italia SpA (Italy); Alfred Dunhill Japan Limited; Mont Blanc Japan Limited; Richemont Japan Limited; Cartier Monde SA (Luxembourg); Richemont Finance SA (Luxembourg); Richemont Luxury Group SA (Luxembourg); R&R Holdings SA (Luxembourg; 66.7%); Cartier International BV (Netherlands); Mont Blanc International BV (Netherlands); Van Cleef & Arpels BV (Netherlands); Baume & Mercier SA (Switzerland); Cartier International SA (Switzerland); Cartier SA (Switzerland); CTL Horlogerie SA (Switzerland); Interdica SA (Switzerland); IWC International Watch Co. AG (Switzerland); Manufacture Jaeger-LeCoultre SA (Switzerland); Piaget (International) SA (Switzerland); Richemont Securities AG (Switzerland); Vacheron & Constantin SA (Switzerland); Van Cleef & Arpels Logistic SA (Switzerland; 80%); Alfred Dunhill Limited (UK); Cartier Limited (UK); Hackett Limited (UK); James Purdey & Sons Limited (UK); Richemont International Limited (UK); Cartier, Incorporated (US); Mont Blanc Inc. (US); Richemont North America Inc. (US); Van Cleef & Arpels Inc. (US; 80%); British American Tobacco (21%).