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Louis Vuitton Bags More Than 5 Percent of Gucci
By Sara Henley  Reuters
PARIS — World luxury leader LVMH raised the prospect of adding Gucci bags to its Louis Vuitton luggage on Wednesday, saying it held over five percent of capital in the Italian house.

Bernard Arnault, the acquisitive head of the French group LVMH Moet Hennessy Louis Vuitton, injected some sparkle into his company's recently dowdy stock with a one-line statement that LVMH had crossed the five percent shareholding threshold in Amsterdam-listed Gucci, long seen as a possible takeover target.

Arnault, who has hinted at a cash source for a big buy through the possible sale of LVMH's large stake in British drinks group Diageo, also spurred double-digit percentage gains in Gucci's stock with the statement.

At one stage LVMH rose 10 percent, prompting an automatic trading halt, and Gucci's peak gain was over 20 percent.

Both shares have sharply lagged behind local markets, squeezed by concerns about their earnings prospects as Asia's crises curbed hitherto voracious appetites for luxury goods.

A company spokeswoman said LVMH, which with 1997 sales of 48 billion francs ($8.6 billion) is about 10 times the size of Gucci's $880.7 million, would make a statement on its intentions with the Gucci holding in the coming days.

The fact that Gucci's stock is also quoted in New York would give LVMH 10 days, according to market rules, to bring word.

Gucci said in an equally terse statement it had not been aware that LVMH intended to take a stake in it. LVMH, following the tight-lipped tradition of continental Europe's top fashion houses, said it had nothing to add for now.

"I think they will make a run at Gucci because I don't think LVMH pussyfoots around," said Claire Kent, analyst at Morgan Stanley in London. "It definitely wouldn't be friendly."

Another London-based analyst, requesting anonymity, said it had long been rumored that if anyone was going to buy Gucci, it would be LVMH or Swiss-based Richemont.

Arnault's rank as a boardroom battler was confirmed in 1997 when he put up a tenacious fight to try to derail the merger that created Diageo, and left him with an 11 percent stake. He won control of LVMH in the late 1980s after stepping in as an outsider with an investment of just 90 million francs.

Morgan Stanley's Kent added that if LVMH offered $75 per Gucci share — which in New York ended on Tuesday around $55 — it would have to sell about half the Diageo stake, which it has said is "not strategic in the long-term."

However, she warned that Gucci has particularly high exposure to Asia. Forecasts from pollsters Barra give Gucci a price-earnings ratio of around 17 times forecast earnings, valuing it sharply below LVMH's ratio nearer 25 times.

While some analysts said bagging Gucci would dent LVMH's earnings visibility, others did not buy the merger idea at all — initial gains in both stocks subsided as the session advanced and LVMH closed up 6.95 percent at 200 euros, with Gucci in Amsterdam 19.27 percent ahead at 55.40.

Cedric Magnelia at Credit Suisse First Boston noted that LVMH in December created an in-house investment fund, and said the Gucci stake should be seen in that light.

He also thought the risk top Gucci management would quit the fashion house would deter Arnault from a full bid — management expertise in the luxury sector is a prized asset.

A Paris-based analyst added that while Gucci would suit LVMH's corporate wardrobe perfectly, a takeover could only go ahead with agreement from Gucci's creative director Tom Ford, a Texan whose designs have enthused the industry.

— with reporting from Kevin Drawbaugh and Nicholas Rialan

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