Johann Rupert sounds weary. In an interview with the FM to discuss the machinations of activist investor Bluebell — which is pushing for a former LVMH executive to join the board — Rupert says: “There’s no way you can have that guy in our inner circle.”
The chair of Richemont — one of the JSE’s most valuable listed companies — cites an upcoming powwow with all Richemont divisions. “In November we’ve got two weeks with all the Richemont companies that come and present their strategies, their budgets and which products they want to launch from April 1 next year... there’s no way in which I’m going to allow one of [LVMH CEO Bernard] Arnault’s trusted friends into those sessions.”
That’s because Rupert will have to square up next month to shareholders at the group’s AGM, where there will be a vote on Bluebell’s request to have Francesco Trapani — a former Bulgari CEO and LVMH executive — join the board.
The emergence of a possible Trojan horse has clearly rattled the well-fortified solitude and collegial bliss that the luxury brands conglomerate — which owns Cartier, Panerai, Piaget, Montblanc and Chloé — has enjoyed for decades.
There’s no way in which I’m going to allow one of Arnault’s trusted friends into those sessions
— Johann Rupert
But no matter the outcome of the September 9 AGM, the emergence of a determined activist shareholder could be a pivotal moment for a company that remains tightly controlled by the Rupert family. For the record, the Ruperts own just over 9% of Richemont but 50% of the voting rights via ownership of 100% of the nonlisted B shares.
Despite being told politely to stuff off, Bluebell Capital Partners remains determined to ring the changes. And while most observers feel it’s on a hiding to nothing against Rupert, there are a surprising number of local Richemont shareholders who are sympathetic to the activist investor’s cause.
Bluebell is an experienced campaigner, with skirmishes at well-known companies such as GlaxoSmithKline, fashion house Hugo Boss, food group Danone, Lufthansa, Italian investment and consumer bank Mediabanco, Danish wind-turbine maker Vestas and most recently Glencore. Bluebell was also involved at troubled investment firm GAM, where Bluebell co-founder and chief investment officer Giuseppe Bivona famously remarked: “They used a bazooka to kill a fly in the boardroom.”
Rupert has not pulled out a bazooka, yet, but he has openly tried to swat Bluebell away. In short, Bluebell has asked for a better balance of board representatives between Richemont’s low-voting A shares and its high-voting B shares.
Rupert argues that LVMH “is one of our company’s key competitors. The board may not responsibly recommend to shareholders to let a person who has a long history of association with that group — as well as a personal relationship with that group’s main shareholder [Arnault] — become a director of our company and intervene in our company’s decision-making process.” He tells the FM that the board has always functioned on a collegial basis, and has never had a board issue go to a vote.
In a letter to shareholders, Rupert contended that Trapani is not independent, having not only a close relationship with LVMH but also its main shareholder, the Arnault family. Rupert noted Trapani was the CEO of Bulgari when it agreed to be bought by LVMH in 2011. He then served as chair and CEO of LVMH’s watches and jewellery division from 2011 to 2014. He also served on LVMH’s board of directors from 2011 to 2016 and as an adviser to LVMH’s chair and CEO from 2014 to 2016.
Rupert said in the letter that in November 2019 Trapani had resigned from the board of luxury brands group Tiffany one day after a merger agreement was executed with LVMH.
Asked by the FM if Trapani is the best candidate for nomination, Bivona says: “We have proposed a candidate with the best possible qualifications.” He argues that Trapani’s association with LVMH ended more than six years ago, and that there is no longer any business affiliation with the luxury goods giant.
Bivona also says there was no issue when Patrick Thomas — who was the CEO of Hermès until 2014 — was appointed as a nonexecutive director of Richemont in 2021.
But Rupert says the Richemont board already has the best jewellery and luxury experts in-house — both on the board and in executive management. “Mr Trapani’s contribution in this respect would not justify adding one additional member to the board,” he tells the FM.
Still, Bivona believes there is an unacceptable and dangerous disequilibrium at Richemont when the company is managed by a shareholder with a stake of less than 10%.
Standing back from the board complexities, it’s possible to see a case for value unlocking at Richemont, and Trapani — with an in-depth knowledge of the jewellery niche — could be a catalyst for it.
Already, there appear to be plans afoot to sell off or merge Richemont’s loss-making online interests. It might also be argued that the soft luxury brands — even with a much improved performance of late — could find a better home in another luxury goods business (possibly even LVMH). The Ruperts are certainly not resistant to shifting their investments into larger entities in exchange for strategic shareholdings. This was done with Rothmans (now part of British American Tobacco) and more recently Distell, which could soon form part of Heineken SA.
But the Ruperts always play a long game. A board representing the family — traditionally steeped in a conservative management approach — might not take enthusiastically to dramatic value-unlocking proposals.
Governance is the ultimate root of other problems — like strategic and operational issues. This is the case with Richemont
— Giuseppe Bivona
Yet Bivona maintains that “governance is the ultimate root of other problems — like strategic and operational issues. This is the case with Richemont.”
He has a point.
While Richemont ranks as one of corporate SA’s most successful global ventures, it has markedly underperformed its international peers. Over five years, $1,000 invested in LVMH would be worth $2,662, in Hermès about $2,650 and in Kering $1,600. For Richemont, the figure is just $1,420.
The problem is that only Richemont’s jewellery division — anchored by Cartier — has been an outstanding performer; the specialist watch-making segment has underperformed, the soft luxury segment is struggling for profitability and the online ventures are racking up sizeable losses.
Bivona says Richemont’s loss-making online efforts are not only a costly distraction but a mystery in terms of the overall rationale. “The online ventures are costing billions of euros. So 90% of that cost is borne by shareholders and only 10% by the Rupert family.”
Bivona also believes Richemont’s specialist watchmaking business — though improving — is not trading at acceptable levels. “The overall thesis is to get Richemont to focus on what it does best, which is jewellery and watches … it’s the single biggest value-creation opportunity for shareholders.”
Realistically Bluebell’s thrust is unlikely to gain traction — though if significant numbers of A shareholders do support the nomination of Trapani there will certainly be more debate about Richemont’s dual-share structure.
Grant Morris, a portfolio manager at ClucasGray, says the structure at Richemont is not an entirely unusual situation for Swiss-listed companies. “Swatch and others have similar structures and to be honest it is difficult to see the Rupert family changing this in the short term… certainly not significantly.”
But others are unhappy with Richemont’s attitude. One veteran market watcher, who asked not to be named, says there is a worrying hint of the arrogance that is sometimes seen from SA businesses when the authority of controlling shareholders is challenged.
Asief Mohamed, chief investment officer of Aeon Investment Management, feels Richemont needs a jolt from a shareholder such as Bluebell. “Our experience is that Richemont treats shareholders with disdain. We requested attendance at a prior AGM. It dismissed the request out of hand.”
Aeon has decided to vote in favour of appointing the Bluebell representative, which will ‘hopefully’ be a wake-up call for the Richemont board to engage with reasonable shareholder requests
Mohamed says Aeon will vote in favour of appointing the Bluebell representative, which will “hopefully” be a wake-up call for the Richemont board to engage with reasonable shareholder requests, once a year. “We call on other shareholders to also vote for the Bluebell representative to help constructive engagement.”
Officially, Richemont has indicated that “after careful consideration”, the board recommends voting against the designation of Bluebell’s candidate. Instead the Richemont board has proposed the election of its independent director Wendy Luhabe — highly regarded in the business world — as representative of the holders of A shares.
The bottom line is the dual-share structure at Richemont. Local shareholder activist Chris Logan refers to a 2017 Harvard Law School research paper, “The untenable case for perpetual dual-class stock”. This argued that controlling shareholders — especially those who hold a small fraction of equity capital — have significant perverse incentives to retain a dual-class structure that has become inefficient.
The paper said in dismantling a dual-share structure the controller would “capture only a fraction of the efficiency gains, which would be shared by all shareholders, but would fully bear the cost of forgoing the private benefits of control associated with the dual-class structure”.
“I’m not saying appoint the Bluebell nominee,” says Logan, but notes: “It’s an interesting debate. In terms of Richemont, one needs to say you have done a great job, but here are all these opinions. It would be great to address this issue — even conceptually.”
Logan, however, concedes there could be valid reasons for being cautious about not giving up artificial control in a market like the JSE. “You do have irrational investors. For instance, in SA the Public Investment Corp — the biggest investment entity in the country — has seen a commission of inquiry into their investment dealings … some of which appear illogical and advance agendas which may often result in the destruction of investor value.”
Earlier this week, voting rights institutional shareholder, Institutional Shareholder Services (ISS) recommended Richemont shareholders reject the proposal to nominate Trapani to the board. According to MT Newswires, ISS said Bluebell failed to present a convincing case for a board shake-up. But ISS supported Bluebell’s proposal to increase the Richemont board size, and the call to ensure A and B shareholders were equally represented.
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