Kering’s €1.3bn real estate bet is a pricey distraction
Buying property is not the smartest use of luxury cash flows
Sell signals come in many forms. Traditional City of London wisdom, for instance, holds that a splashy new headquarters is reason to steer clear of a stock. That is one way to look at Kering’s decision to spend €1.3bn on a building in Milan’s iconic Via Montenapoleone.
To be fair, buying freeholds in key locations is not a new trend in the luxury sector. Brands want to secure their footprint in the face of scarcity and competition. Doing something special with the building and the store can also give them an “experiential” edge to help awe their customers. LVMH has been snapping up real estate in New York, Paris and Milan. Prada too has bought its New York building. That piles pressure on rivals to plant their own flags.
Yet buying real estate is not the smartest use of luxury cash flows. On the face of it, Kering’s deal does not look too bad. The group is getting 11,800 square metres, of which more than 5,000 is retail space. At current Milan market rates, that could theoretically cost perhaps €50mn a year to rent. Assuming a typical yield of 3.8 per cent, it roughly justifies the building’s price tag.
But that is much lower than the double digit return on capital that Kering made in 2023, according to S&P Capital IQ. And it is unlikely to be making anything approaching current rents from long-term tenants such as high-end (and LVMH-owned) café Cova.
Seen in this light, the push to secure prime real estate is essentially a round of beggar thy neighbour for luxury companies. Capex intensity is rising, from 6 per cent of sales in 2019 to almost 9 per cent, according to Bernstein. The dilution of returns is manageable for giants such as LVMH. But it is more painful for smaller brands — which might explain why Kering’s real estate strategy also involves finding co-investors to limit the total capital involved.
The Milan building is by no means Kering’s only new project. Over the past two years it has bought real estate in Paris and New York, fragrance house Creed, sunglass maker Maui Jim and a stake in Valentino — for a total investment of perhaps €10bn. That is a big push for a group that generates €4.5bn of cash flow a year.
It also means Kering has a lot on the go. That is not a comfort given the dismal performance at its key Gucci brand, which recently warned on profits. Given Gucci accounts for around half of Kering’s sales, the stock’s performance depends on turning it around. Glitzy distractions, real estate or otherwise, should be eschewed.
François Pinault’s grandson, 26, replaces him on Christie’s board
Appointment hints at succession planning inside billionaire family behind French luxury group Kering
A grandson of French billionaire François Pinault has joined the board of Christie’s in the first sign of third-generation succession planning within the family behind luxury group Kering.
François Louis Nicolas Pinault, 26, replaced family patriarch and Kering founder François Pinault, 87, as a director on the board of the auctioneer on March 26, according to a filing published this week.
London-based Christie’s was founded in 1766 but was bought by Artémis, the Pinault family’s holding company, in 1998.
The younger Pinault is a French national whose occupation is listed as “product marketing manager”, according to the document. The move was first reported by Bloomberg.
Kering, which owns brands including Gucci and Saint Laurent, has been led by the patriarch’s son, François-Henri Pinault, 61, ever since his father stepped back from the group he built in 2003. François Louis Nicolas is Francois-Henri’s eldest son.
Kering’s success has made the Pinaults one of France’s richest and most prominent families, although the group is currently facing more challenging times compared to rivals LVMH and Hermès as sales at Gucci slide.
Neither of François-Henri’s siblings are involved in day-to-day management at Kering, but they sit on the supervisory board at Artémis.
The appointment of a younger member of the Pinault family to a prominent board seat within the family holdings comes at a time of heightened interest about the ascension of a new generation within high profile family-controlled businesses in France.
Two of the sons of LVMH founder Bernard Arnault are expected to join the board of the luxury leader later this month, giving four out of his five children seats. All five have roles within the group.
In addition to housing the controlling stake in luxury group Kering and the family’s art collection, Artémis also has investments in sports apparel brand Puma, vineyards, luxury fashion brands Courrèges and Giambattista Valli and technology firms.
Last year, Artémis bought a majority stake in Hollywood talent agency Creative Artists Agency, which was presented as a move to diversify the family’s holdings away from pure luxury.
Christie’s, which had sales of €6.2bn last year, is an important business for the Pinault family although it is not their largest.
François Pinault has a personal interest in the art world, and Christie’s lends the family both visibility and credibility in the rarefied world of art collecting.
Over the past half-century, Pinault has amassed a collection of more than 10,000 pieces focusing on contemporary works that are shown in the museums he has built in locations including Bourse de Commerce in Paris and Palazzo Grassi in Venice.
Germany considers revival of national service in ‘landmark’ military reforms
Restructuring aims to make armed forces better prepared to defend Nato territory
Germany has unveiled the most sweeping military reforms since the cold war, with plans under consideration for the revival of national service part of efforts to make its armed forces better prepared to defend Nato territory.
Speaking in Berlin on Thursday on the military alliance’s 75th anniversary, defence minister Boris Pistorius said he had signed an order to reorganise the German military from top to bottom.
“It is a landmark reform . . . Our goal is to restructure the Bundeswehr in such a way that it is best positioned in the event of defence, in the event of war,” said Pistorius. “Nobody should have the idea of attacking Nato territory — this is what we [want to] convey.”
The measures are part of a huge shift in Germany’s attitude towards its armed forces, reflecting what Chancellor Olaf Scholz said was a Zeitenwende or turning point in security policy after Russia’s full-scale invasion of Ukraine two years ago.
A single operational command will take charge of four new component forces, with cyber warfare raised to an equal footing alongside land, air and sea operations.
Military officials drawing up the plans have been given six months to implement them. A key demand from the ministry is that the Bundeswehr will be made ready for compulsory national service in Germany, Pistorius said, should a decision be taken to reintroduce it.
A defence ministry proposal on a model of national service for young adults will be put before German politicians in the coming weeks, he added.
A so-called Scandinavian model in which any military service would in effect be voluntary and gender neutral, as is the case in countries such as Sweden, is seen as a likely candidate.
Pistorius said the measures would re-establish the Bundeswehr “for a new, old challenge”.
Berlin’s new approach has driven a significant uptick in German defence spending, with Europe’s largest economy this year meeting Nato targets to spend 2 per cent of gross domestic product on defence for the first time in decades.
Since taking control of the defence ministry in January 2023, Pistorius has emphasised that other cultural and structural changes are equally vital if Germany is to meet its Nato pledges and help deter Russian aggression.
Reform of the Bundeswehr’s structure has been a top priority. With a close eye on the way Russia has waged war in Ukraine, defence ministry officials and military brass have been plotting a radical overhaul during the past few months.
The Bundeswehr’s existing structure evolved piecemeal over three decades to broadly respond to “crisis management” operations in Germany and humanitarian situations abroad.
It has two operational commands, six military organisational areas and 27 separate planning and co-ordination agencies.
Although it is one of the largest military forces in Nato, with 182,000 serving men and women, its sprawling structure left it ill-positioned for the strategic challenges faced by Berlin and its Nato allies.
The reforms will enable the Bundeswehr to make “quick decisions”, Pistorius said, and give German ministers as well as Nato allies a clearer and more direct relationship with the military command.
Elevating cyber capabilities and unifying the military’s various existing components into four clear branches would also make it cheaper and more efficient to perform the urgently needed technical updates to fight a future war, he said, pointing to the Ukraine war as a learning tool.
“There is no war, and hardly any combat situation [we observe] in Ukraine, where digital command and control capability does not play a central role in ensuring that a battle can be [won],” he said.
ING shows the way to win in European banking
While other banks offer poor returns, the Dutch group has promised billions of euros to investors
ING is perhaps best known outside of the Netherlands for buying the failed British merchant bank Barings in 1995. Not much of interest has happened since.
This year, however, with a surfeit of regulatory capital, it has promised billions of euros to investors via dividends and share buybacks. Its share price has shot up, ahead of European banks that have already outrun their global peers.
This playbook is hardly original. After years of constraint, mostly due to regulatory restrictions during the Covid period, European and UK lenders are picking up the pace on payouts.
In the five years through 2022 shareholder payouts provided a roughly 6 per cent yield. Dividends made up almost all of this, according to Citi. Between 2023-25 that total yield will touch 10 per cent, of which a third will come via buybacks. That shift comes partly because many banks trade below their book values.
But even among this group, ING stands out. By mid-2027, the Dutch bank has promised to hand out €12bn of dividends — a quarter of its market capitalisation. Before then, the lender says it will buy back nearly the same amount of shares. That explains why ING’s share price is up 30 per cent since early February, following some disappointing full-year results.
ING, and banks such as Italy’s UniCredit, can afford to dole out capital. Its common equity tier one ratio at over 14 per cent of risk weighted assets is well beyond its 12.5 per cent target. As important, its mid-teens return on equity is already keeping pace with its cost of equity. As a result, the bank trades close to its tangible book value.
This is a rarity in European banking, where poor returns have eroded shareholder value in recent years. Deutsche Bank, Société Générale and Barclays are notable offenders. Investors have accordingly priced these three at half (or less) of their respective book values.
This makes ING’s performance look more sustainable than most. True, just rerouting excess capital does not expand its business. It also risks serious flak from Dutch politicians and regulators who worry about threats to the banking sector, especially after the travails of America’s regional lenders a year ago.
One idea for growth is to squeeze more capital efficiency from its international wholesale banking business. This makes up a third of profits but almost half its capital requirements. Bringing the two in line could release €44bn of capital to recycle elsewhere in the group.
Even partial success should lift ING’s share price, already at five-year highs. Now that would certainly be interesting to investors.
Italy seizes assets worth €600mn in connection with alleged EU recovery fund fraud
Multinational raids lead to 22 arrests co-ordinated by European Public Prosecutor’s Office
Police in Italy and several other European countries have arrested 22 people and seized assets worth €600mn in connection with alleged fraud involving the EU’s post-pandemic recovery fund.
The Italian financial police said it had seized apartments, villas, luxury cars, watches and jewellery with a total value of more than €600mn. It added that over 100 suspicious financial transactions had been investigated.
The alleged fraud is likely to revive concerns about potential misuse of the EU’s €800bn recovery fund, a one-off joint borrowing programme that was launched to reboot the bloc’s economy after the Covid-19 pandemic.
Italy is the bloc’s biggest single recipient of the fund, slated to receive about €200bn in grants and loans.
Suspected fraud cases involving EU funds fall under the jurisdiction of the Luxembourg-based European Public Prosecutor’s Office, which co-ordinated the raids and the arrests in Italy, Austria, Romania and Slovakia.
The EPPO said that a multinational criminal association had successfully applied for €600mn in EU grants between 2021 and 2023 by setting up a network of fictitious companies and alleging the funds were needed for their international expansion.
The funds were granted to the fake companies by Simest, an Italian government-owned entity that was set up to help small businesses grow. The Italian financial police said in the statement that Simest had co-operated fully in the probe.
Of the 22 individuals arrested, eight were detained while 14 were placed under house arrest. An accountant suspected of involvement in the complex fraud had also been barred from practising, Italian authorities said.
Italy’s financial police said on Thursday the probe demonstrated adequate checks were in place to ensure the “proper implementation” of the funds and “recover illegally obtained” EU money.
The European Commission said it had noted the announcement, adding that the recovery fund “contains a very robust control framework”.
EPPO and Italian authorities said the scheme was based on an elaborate network of shell companies, including in Slovakia, Romania and Austria. It said these generated fake corporate balance sheets by using overseas cloud servers, crypto assets and artificial intelligence to “conceal and protect” their activities.
“The suspects transferred the funds to their bank accounts in Austria, Romania and Slovakia as soon as they received the advance payments,” the EPPO said.
It has added that all persons concerned are presumed to be innocent until proven guilty in Italian courts.