Buccellati acquisition by GangTai Holdings - Case Study

Buccellati was founded in 1919 when the founder Mario Buccellati opened its first store in Milan, Italy. Mario Buccellati was a talented goldsmith who inherited a Italian Renaissance jewellery craftsmanship. Buccellati applied a rare craft - weavy grain on gold, on its jewels, making them quite unique. Buccellati quickly gained fame, his clients included European royal families, the Pope of the Vatican. In 1954, Buccellati opened a store on the 5th Avenue in New York.

Buccellati is a typical family-owned business. Family heritage is the key to a brand's perennial glory. After Mario Buccellati, his son Gianmaria Buccellati continued to make the brand flourish. Gianmaria Buccellati turned the brand into a worldwide top luxury brand.

Gianmaria Buccellati was also a very talented jewellery designer, his works did not only retain the traditional Italian craft, but was of a high aesthetic taste. He always drew inspiration from natural scenery. In 1979, Gianmaria Buccellati opened a flagship store in the Paris Vendome Square, enhancing the brand position. The Kremlin held a jewellery exhibition for Gianmaria Buccellati, which is said to be the world's first exhibition for a living jewellery designer. Gianmaria Buccellati died in 2015 at the age of 86.

Right of control on sale

Buccellati had maintained a strict family business system. Gianmaria Buccellati served as chairman of the company, his wife was responsible for advertising, the three sons for the business and marketing in the US market as well as silverware department. Gianmaria Buccellati said in an interview that he was proud of Buccellati being the only brand in the world's top jewelry names that could maintain a strict family system.

But in 2013, the Buccellati family sold the company's controlling stake to the Italian private equity fund Lauro Cinquantadue S.r.l. Why is this?

In recent years, there has been a wave of mergers and acquisitions in the global luxury goods industry. Several large luxury groups have acquired independent luxury brands successively. For example, LVMH Group’s acquisition of top jewellery brand Bvlgari in 2011. Another top jewellery brand, Harry Winston, was acquired by Swatch Group in 2012, after which the performance has been greatly improved.

The M&A wind tide in luxury industry reflects its competitiveness, and the great power of capital. In order to continue the operation, aside from maintaining high product quality, luxury brands also need to advertise, expand stores in the high-end venues and these expenses are enormous.

Due to limited public information, Buccellati's financial situation before 2013 was not revealed, therefore we can not be informed of the reasons for the Buccellati family's sale of the company's controlling stake. However, Buccellati introducing private equity’s support so as to obtain the opportunity to expand the brand, is also a good choice under the trend of M&A in luxury jewellery industry.

In May 2013, Italian private equity fund Lauro Cinquantadue S.r.l. acquired a 66.09% stake in BHI (Buccellati) from the Buccellati family, including all of BHI's stake held by Gianmaria Buccellati and his wife, Rosa Maria Bresciani.

Lauro Cinquantadue S.r.l.'s contribution of investment was 73.2 million euros. BHI valuation was about 110,75 million euros, corresponding to the sales of 27 million euros in 2013, with a 4.102 P/S ratio.

After the completion of the equity transfer in 2013, Gianmaria Buccellati's three sons Andrea Buccellati, Maria Cristina Buccellati, Gino Buccellati held 9.92%, 9.99% and 9.99% of shares in BHI respectively, and the daughter of Andrea Buccellati, Lucrezia Buccellati holds 1.06% equity in BHI. Gianmaria Buccellati’s brothers, Luca Buccellati holds a 1.59% stake. Thierry Andretta, a former senior executive of BHI, holds a 1.35% stake.

Since BHI repurchased stake from Thierry Andretta, the shares were converted into BHI's own treasury stock. Coupled with a series of capital increase activities carried out by the family, BHI company's equity structure was as follows:

The equity structure was categorised into 4 classes, ABCD

- Class A shares (all held by private equity funds)

Lauro Cinquantadue S.r.l. holds all Class A shares of BHI Company. Class A shares accounted for 66.42% of the total share capital.

The rights of Class A are as follows:

(I) ordinary voting rights;

(Ii) the right to forcibly sell all the remaining Class B Shares, Class C Shares and Class D Shares when the 100% Class A Shares are transferred to a third party;

(Iii) the absolute majority (hereinafter referred to as "50% Class A Shares and 50% Class B Shares") under the following specific resolutions, including: (a) the special provisions, including the increase in share capital, as set out in Article 2441 of the Italian Civil Code (B) resolutions relating to amendments to the rights of Class A Shares and / or Class B Shares (but without any effect), and (c) relating to A Shares of the shareholders of the company's transactions;

(Iv) right to appoint five members of the Board (7 members in total) and 2 vice-chairmen;

(V) right to appoint the Chief Executive Officer (if only one chief executive officer is appointed)

(Vi) right to appoint two members of the statutory audit committee and one acting member (three members and two proxy members in total).

Class B shares (all held by the founder family)

Buccellati family holds all of the B shares. Class B shares accounted for 32.72% of the total share capital

Class B shares’ right are as follows:

(I) ordinary voting rights;

(Ii) right to sell the shares when selling 100% Class A Shares or at least Class A share of BHI 50.01% of the voting rights;

(Iii) a five-year lock-up period from May 24th, 2013 (Class B shares will benefit from a specific exemption relating to such lock-up, including but not limited to the transfer of the associated company as a beneficiary)

(Iv) the absolute majority (hereinafter referred to as "50% Class A Shares and 50% Class B Shares") under the following specific resolutions, including: (a) the special provisions, including the increase in share capital, as set out in Article 2441 of the Italian Civil Code (B) resolutions relating to amendments to the rights of Class A Shares and / or Class B Shares (but without any effect), and (c) relating to A Shares of the shareholders of the company's transactions;

(V) Right to appoint two members of the Board (seven members in total) and the chairman

(Vi) veto power to particular matters of the board (ie, a vote in favour of a director appointed by a Class B shareholder), including: a) a proposed vote by the shareholders' general meeting as set out in Article 2441 of the Italian Civil Code (B) the proposed shareholders 'vote on the amendments to the relevant rights of Class A Shares and / or Class B Shares (but without any effect), but not to the effect of any of the other parties' (C) transactions involving the related parties of the Class A Shareholders, and (d) any disposition relating to the particular Buccellati trademark;

(Vii) right to appoint a member of the statutory audit committee (which shall concurrently serve as Chairman of the Committee) and one acting member (three members and two proxy members in total).

Class C shares (BHI's treasury shares )

BHI holds all of the C-class stocks which BHI repurchases from former senior executives Thierry Andretta’s 1.35% stake. The current C shares accounted for 0.86% of the total share capital.

The rights of category C are as follows:

(I) No right to vote within three years since subscription;

(Ii) right to sell the shares when selling 100% Class A Shares or at least Class A share of BHI 50.01% of the voting rights

(Iii) a five-year lock-up period from May 24th, 2013.

Class D shares (not issued)

D shares are not issued and may be prepared for BHI's current executive share options. But BHI's current executives' options will be canceled due to the acquisition of BHI by Gangtai Co.

The rights of Class D shares are as follows:

(I) No right to vote within three years since subscription;

(Ii) right to sell the shares when selling 100% Class A Shares or at least Class A share of BHI 50.01% of the voting rights

(Iii) a five-year lock-up period from May 24th, 2013.

Since the lower number of C shares do not have voting rights and D shares are not issued, the devise of ABCD shares focused on A shares and B shares held by private equity fund. AB shares formed a balancing ownership structure, mainly reflecting in three aspects:

1. Voting rights: both A and B shares hold ordinary voting rights. Then in general matters, private equity fund gains the upper hand since it owns more shares. However, when it comes to specific issues of BHI, such as related transactions with private equity funds, the right to amend the right of Class A and Class B, are subject to an absolute majority principle. There is no specific content in the announcement that explains the principle of absolute majority.

2. Board of Directors and corporate governance: board of directors contains a total of seven seats. Class A shares held by private equity funds can appoint five board members and the B-shares held by the Buccellati family can appoint two board members. Buccellati family can also appoint the chairman. The Buccellati family has a veto power for particular matters on the board of directors, such as amendment to the rights of Class A and Class B shares, related transactions with the private equity fund, and disposition of the Buccellati trademark. At the same time, private equity funds is entitled to appoint CEO. It shows that founder's family still has a great influence on the board. The current chairman of BHI is Andrea Buccellati.

3. Tender Offer from third parties: If a third party proposes to acquire BHI, the private equity fund may transfer the remaining Class B shares, Class C shares and Class D shares when the 100% Class A Shares are transferred to a third party Shares. If the private equity fund does not choose to force the sale of B, C, D shares , B, C, D shares may require to be sold when a third party acquiring 100% A shares or at least a Class A share of BHI 50.01% of the voting rights.

The third aspect is important. This provision is prepared for possible third party takeover offer.

Assuming a third party extends a takeover offer of BHI, Lauro Cinquantadue Srl can sell all the A shares at the same time, forcing to sell the remaining B, C, D shares. As a result, a third partie will be able to acquire 100% equity of BHI through private equity fund Lauro Cinquantadue S.r.l. alone.

On the surface, Lauro Cinquantadue S.r.l. controls BHI's "life and death". If it wants to sell BHI to a third party, it can drive the Buccellati family out of the company by forcing sales of Class B-shares while selling 100% of Class A shares.

In reality, however, this provision serves more like a checks and balances point between private equity fund and the founder’s family. Because the family is still very important for the future development of BHI. The history, craft and design of the brand can not be separated from the Buccellati Family. Even if a third party intends to acquire BHI, it is likely to consider retaining a minority stake in the founder's family.

In this way, the family retains a great influence. For example, if Lauro Cinquantadue S.r.l. sells all Class A shares, and the founding family is not satisfied with the buyer, they can ask to sell all B shares to cash out. A company without the founding family may take risk in future development. In other words, the founding family is BHI's precious resource, to which BHI's value is subject. Consequently, the founding family’s right to sell Class B Shares is more like Lauro Cinquantadue S.r.l. ’s constraint.

Italian private equity fund Lauro Cinquantadue S.r.l. whose only shareholder is Clessidra Capital Partners II, is very influential. Clessidra Capital Partners II is a fund established by Clessidra, and the GPs holds 1.2% shares and are appointed by Clessidra.

Clessidra is an illustrious PE firm specialised in investing in luxury brands, whose ultimate shareholder is an Italian listed company, Italmobiliare S.p.A .. In 2015, Clessidra acquired 90% of shares in Roberto Cavalli, a well-known luxury brand.

BHI has changed a lot after Lauro Cinquantadue S.r.l.’s acquisition.

After 2013, BHI conducted 4 capital increase movements in accordance with the shareholding ratio, collectively raising 30.1375 million euros, thereby enhancing the company's financial strength considerably. In consequence, BHI expanded the sales channels and continuously increased the revenues. From 2014 onward, Buccellati launched three new stores, located in Capri Island in Italy, Barber Harbour in the US, and Galeries Lafayette in Paris respectively.

However, on account of the larger expenditure caused by expansion, BHI did not achieve profitability. Its EBITDA and net profit are both negative. As disclosed, BHI’s operating income in the first three quarters of 2014, 2015 and 2016 is 33 million euros, 41 million euros and 29 million euros respectively, net profit 7 million euros, 3 million euros and 9 million euros.

The announcement revealed that in the first three quarters of 2016, negative EBITDA existed in New York stores, Beverly Hills store, Chicago store and Barber Harbour store and Paris Galeries Lafayette department store whereas the rest of seven stores show positive numbers of EBITDA.

BHI in 2015, the first three quarters of 2016 EBITDA were -17.21 million euros, -8.92 million euros, there is an upward trend.

Meanwhile, Buccellati lost the iconic Paris Vendôme Square shop. In 2015, BHI received the lease compensation for the shop in Vendôme, with an amount of compensation of € 23.5 million and € 14.6 million after deducting income tax. Excluding the lease compensation, BHI’s net profit in 2015 is -11.07 million euros.

As BHI gradually changed the attitude to a more low-profile, Buccellati family still grasped the company's management. Although Gianmaria Buccellati has died in 2015, his eldest son Andrea Buccellati is still the chairman and creative director of the company. Andrea Buccellati's daughter, Lucrezia Buccellati, has become the first female designer in BHI history and the co-creative director.

Lucrezia Buccellati said in an interview: "One of Buccellati's secrets is that the family has been creative for the past 100 years. We are growing up in the company every day to absorb new things. Each generation of designers are slightly different from their predecessors. But you can immediately identify the brand DNA from every piece of jewellery without being exposed to the logo."

The GangTai transaction

On December 23, media announce Buccellati's acquisition by GangTai Group. See our article detailing the news.

In this transaction, GangTai Holdings intended to indirectly acquire a 85% stake in BHI. This cross-border transaction was achieved in two steps. In the first, Gangtai Group, the major shareholder of GangTai Holdings, set up a subsidiary, Yuelong Group. The latter then acquired 85% stake in BHI through Italian SPV, with a cash offer. The second step consisted in Gangtai Holdings acquiring 100% equity in Yuelong Group from GangTai Group, effectively gaining 85% equity in BHI.

This two-step design, en effect, transferred the financial pressure, exchange rate risk, negotiation risk and other uncertainties of cross-border M&A deal from GangTai Group improving the success rate of the listed company.

In the transaction, BHI 85% stake was priced 195.5 million euros, the corresponding 100% stake’s valuation was about 230 million euros, with sales in 2015 being 40.89 million Euro, with a 5.624 P/S ratio.

As early as the first half of 2016, foreign media have reported that the world's top luxury group Richemont intended to acquire Buccellati. The announcement confirmed the authenticity of the news. GangTai Holdings began to delist in the first half of 2016. In other words, GangTai Holdings was competing with Richemont Group for the acquisition Buccellati, and won.

Why did the Lauro Cinquantadue S.r.l. and the Buccellati family sell the stake in BHI? How could GangTai Holdings beat Richemont Group? There is no detailed disclosure in the announcement.

First of all, compared to the transaction in 2013 when Lauro Cinquantadue S.r.l. obtained BHI’s control, BHI’s valuation rose about 107.67%. Lauro Cinquantadue S.r.l. is undoubtedly the winner of this deal.

Lauro Cinquantadue S.r.l. conducted a handful of capital increase activities after the acquisition of BHI, which strengthened BHI's financial condition, allowing BHI to open new stores and grow sales. But BHI was still a loss asset.

If achieving profitability is a protracted war for BHI in which strong external aid is called for, it was better for Lauro Cinquantadue S.r.l to seell BHI's controlling stake, introducing more powerful investor. On the one hand, Lauro Cinquantadue S.r.l. was able to exit part of the investment, on the other, by sustaining minority position, it keeps the possibility of share appreciation.

In the transaction, GangTai Holdings intended to launch private placement directed to the major shareholders GangTai Group, Hangzhou Zhenyuan by 15.42 RMB/ share price, raising funds no more than 1.36 billion RMB. The raised amount, excluding deducting fees, was intended for Buccellati’s marketing network construction and the focus of this project is likely to be the Chinese market.

Unlike other luxury jewellery brands who attach great importance to the Chinese market, Buccellati currently has no stores in mainland China. Perhaps Lauro Cinquantadue S.r.l. and the Buccellati family value the Chinese strategy behind the deal. Gangtai Holdings has become a domestic bourgeoning Internet jeweller with channel advantages through a series of acquisitions.

Gang Tai Holdings has been envisaging the preliminary post-acquisation strategy for Buccellati. First, BHI will retain the original management and Buccellati family members. Second, Buccellati will vigorously expand in China and other emerging markets.The plan is to open 88 direct sale-stores. Finally, Buccellati will focus on the young consumer groups by developing new product lines in classic and entry-level jewellery, to broaden consumer groups, as well as launching glasses, perfume and other new product lines when the timing is appropriate.

The announcement revealed that in terms of new products, Buccellati will focus on the best-selling Icona series, ensuring a complete product line ranging from 2,000 to 50,000 euros, and moderately improving the midrange products as well as expanding production scale. In addtion, Buccellati decided to focus on women's jewelry watches, to provide with customised line in the range of 10,000 euros to 50,000 euros in the high-end classification, to maintain the appropriate classification in 50,000 to 300,000 euros range high-end line; and to develop bride ring line as well as assorted bracelets, earrings and necklaces.

New design of Class ABCD shares

In this transaction, Lauro Cinquantadue S.r.l. did not sell all of the A shares, the founding family sold part of the Class B shares, still retaining a minority stake in BHI.

Gangtai Holdings holds an 85% stake in BHI indirectly, and Lauro Cinquantadue S.r.l. holds a 7.5% stake in BHI while the founders hold a 7.5% stake in BHI.

BHI will develop a new corporate by-laws on the date of delivery and redesign the ABCD IV. The 85% stake in BHI, now held by Yuelong Group will become a new Class A-share, the 7.5% stake in the Buccellati family will become a new B-share, and BHI's treasury shares will become the new C-shares. Remaining 7.5% held by Lauro Cinquantadue Srl will become new D shares.

The design of the new Class ABCD share is not the same as the original Class ABCD shares:

Class A shares (all held by Yuelong Group)

Yuelong Group’s 50% stake in BHI to become a new Class A-share.

The rights of the new A shares are as follows:

(I) ordinary voting rights;

(Ii) Right to forcibly sell the remaining Class B,C and D Shares one the condition of 100% transfer of Class A Shares to a third parties after the five-year lock-up period from the date of registration of the BHI’s new by-laws.

(Iii) the right of first refusal of Class B, C and D Shares under transfer or Shareholder resale;

(Iv) right to appoint six members of the Board (7 members in total), one chairman and one or more vice-chairmen;

(V) the right to receive dividends at a higher ratio than the relevant shares at BHI.

New Class B-shares (all held by the founder's family)

(I) ordinary voting rights;

(Ii) right to sell the shares when selling 100% Class A Shares or at least Class A share of BHI 50.01% of the voting rights

(Iii) a five-year lock-up period from the date of registration of the BHI ’s new by-laws

(Iv) the right of first refusal to A shares of A Shareholders resold by A shares’ shareholder.

(V) right to appoint one Board member (7 members in total) and honorary chairman;

(Vi) right to receive dividends calculated only at 10% of relevant shareholding ratio.

New C shares (BHI’s treasury shares)

(I) no right to vote;

(Ii) right to sell the shares in proportion when selling 100% Class A Shares or at least Class A share of BHI 50.01% of the voting rights

(Iii) a five-year lock-up period from the date of registration of the BHI New Bylaws;

(Iv) the right of first refusal to sell Class A shares for Class A shareholders;

(V) right to receive dividends calculated only at 10% of relevant shareholding ratio.

New D-shares (all held by private equity fund)

1. no right to vote;

2. right to sell the shares in proportion when selling 100% Class A Shares or at least Class A share of BHI 50.01% of the voting rights.

(Iii) a five-year lock-up period from the date of registration of the BHI New Bylaws;

(Iv) the right of first refusal to sell Class A shares for Class A shareholders;

(V) right to receive dividends calculated only at 10% of relevant shareholding ratio.

Analysis

If the design of the new ABCD shares takes effect, Gangtai Holdings will receive the control of BHI that Lauro Cinquantadue S.r.l. gives in, and the control of the Buccellati family will be further weakened.

The specific result is four-fold:

(1)Voting rights: Class A shares held by Yuelong Group (85% of the total share capital) and Class B shares (7.5% of the total share capital) held by the Buccellati family are grated with ordinary voting rights with former overwhelmingly prevailing over the latter.

(2) Board of Directors and Management: Yue Long Industrial will receive 6 seats on the board of directors out of 7 seats in total, and may appoint the chairman. Buccellati family can gain a board seat, may appoint honorary chairman. GangTai Holdings will hold the management of BHI.

(3) dividend rights: Yuelong Group can get the dividend higher than the shareholding ratio (85%), while the Buccellati family, Lauro Cinquantadue S.r.l. and BHI have dividends lower than the shareholding.

(4) tender offer from third parties: If a third party proposes to acquire BHI, Yuelong Group may sell all Class A shares to it and forcibly sell the remaining B, C and D shares, controlling BHI’s destiny. Yuelong Group has a pre-emptive right if shareholders of B, C, and D shares plan to transfer after the 5-year lock-up period. At the same time, if Yue Long Group intends to sell 100% Class A shares or at least BHI 50.01% of the voting shares of Class A shares to third parties, the B, C, and D shares have the right to be sold along.

Excluding the Class C-shares held by BHI, the design is more like the mutual restrictions among Gangtai Holdings, the Buccellati family, and Lauro Cinquantadue S.r.l. Gangtai Holdings is able to sell all Class A shares to third parties and forcibly sell the remaining B, C, and D shares to grasp the destiny of BHI.

Although in the meantime, the Buccellati family and Lauro Cinquantadue S.r.l. have the right to sell along with GangTai. If the third party appreciates the value of the founding family, hoping to keep its minority position to bind the founder's family, the founding family’s right to sell would have a negative impact.

Eventually, the relationship between the Buccellati family and BHI resembles more the one of a management team and its company. As the designer and management, the Buccellati family plays a decisive role in the company's development, but has no sayings over decisions with only a minority stake.

In other words, the Buccellati family turns into the employee of Gangtai holding from the original owner of the company after the completion of this transaction.

Buccellati's evolution history is heuristic for a family business. The traditional family businesses need to be vigilant, and constantly make changes in order to continue to survive in changing environment.

Buccellati is essentially a jewelry brand that sells design and craft, which are both core values of the brand. Only if Buccellati's designers - that is the founding family, keep being creative, can the brand have vitality for further development.

After two transactions, the Buccellati family completed two large cash out from its shares, but also relinquished the company's control. The Buccellati family is still an important designer resource for BHI, valuable human resources. Their creativity and family heritage are the company's precious intangible assets.

GangTai Holdings acquired 85% stake in BHI in the framework of Class ABCD shares, coming with a stable control and dividends higher than shareholding ratio. This is an exemplary case for A-share listed companies to make good use of local laws and regulations in cross-border mergers and acquisitions.