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Short circuit

Just five of the world’s 50 biggest public semiconductor players are in Europe. The largest, 222 billion euro ASML, which on Wednesday reported a better-than-expected profit for the first quarter, designs chipmaking machines, not chips. And Dutch peer NXP Semiconductors is U.S.-listed. For policymakers and financial advisers hoping to create a true European chip champ, that leaves the obvious pairing of Germany’s 43 billion euro Infineon with 28 billion euro STMicro.

Infineon was reported to have hired a bank to investigate just such a deal in 2017. Opposition from the French government, which alongside Italy owns 27.5% of STMicro, sank the deal. Arguably the recent renaissance of pan-European industrial policy, including prodigious semiconductor subsidies, makes now a better time. Paris backed the ultimately doomed Franco-German merger of Alstom and Siemens’ rail unit – an effort to fend off foreign behemoths. Why not try the same with chips?

The first challenge is financial: potential cost savings can’t, on their own, fund a rich acquisition premium. According to a Breakingviews analysis of five comparable sector marriages, the average annual synergies targeted in such deals are about 2.5% of combined operating expenses and costs of goods sold. For Infineon and STMicro, that implies about 390 million euros a year. Taxed and capitalised, they’d be worth 3.3 billion euros – enough for a paltry 12% premium on STMicro’s market value.

Infineon’s last big acquisition, of Cypress Semiconductor in 2019, was admittedly premised as much on boosting sales as it was on reducing costs. But even in markets where Infineon and STMicro overlap, like in the areas of automotive and industrial chips, it’s unclear how their technologies could be combined to wring more cash out of major customers.

The final problem is politics. It’s a miracle that STMicro, whose anchor shareholders are France and Italy, isn’t already riven by infighting. Paris and Rome would probably require veto powers and job guarantees in return for accepting a diluted stake in the combined entity. That would make a financially stretched deal even less attractive for Infineon’s investors. Creating Europe’s chip champion looks like a challenging puzzle for even the most PowerPoint-dextrous of M&A bankers.

Move comes as European regulators test gig-economy model for food delivery

Uber is attempting to break what it called Just Eat Takeaway.com’s “monopolistic” stranglehold on the German food delivery market, in the biggest test yet for the Silicon Valley company’s use of employed couriers instead of gig workers for meal conveyance.

Uber Eats will launch in Germany for the first time over the next few weeks, starting in Berlin, in its biggest entry to a new country since 2018.

Pierre-Dimitri Gore-Coty, Uber’s senior vice-president of delivery, told the Financial Times that Germany was one of its fastest-growing markets in ride-hailing, which it operates in 13 cities, and a “strategically important country” as it strives for group profitability for the first time this year.

“Europe in particular has been a bright spot for [Eats], both in terms of some of the growth we’ve seen, but also, frankly, in terms of the strengthening of our market position,” he said, pointing to market share gains in the UK and Spain.

More than 24m people in Europe used Uber Eats to order meals from more than 126,000 restaurants last year, which were delivered by about 370,000 couriers.

But in Germany, Gore-Coty said, “you have one player that is effectively dominating that country”, describing Just Eat Takeaway’s commission rates as “extraordinarily high”. “That translates into consumers and merchants actually being quite desperate for additional options,” he added.

Uber Eats’ couriers in Germany will be employed by fleet management companies, similar to minicab firms, who are contracted by Uber. The scheme is similar to how its passenger business already operates in the country, which bans the use of drivers without a passenger transportation licence.

Uber will pay its German partners for each order. It is then up to those fleet managers how they pay their employees. A similar model was already put in place at its food delivery business in Geneva after a court case in September last year, but Germany would be a far larger test for its profitability.

Gore-Coty said working with a fleet manager “typically adds cost to the system” and can make it harder to expand beyond larger cities, but it can also “create some efficiency” in how workers are managed. “There are a lot of factors at play” in how the economics compare with its original gig-worker model, he said.

Despite their arguments that workers prefer the flexibility of being independent contractors, Uber and other gig-economy companies are facing regulatory challenges across Europe, after February’s UK Supreme Court ruling that Uber drivers should be classified as workers rather than independent contractors.

Prosecutors in Milan have threatened online delivery services with fines running into hundreds of millions of euros after a year-long investigation into working practices. In Spain, the government is planning to give employee status to tens of thousands of delivery workers, forcing Uber to consider switching to a German-style employment model.

“We will continue to advocate for an independent contractor model,” said Gore-Coty, arguing that workers preferred its flexibility. But Uber is having to get used to changing its approach. “I don’t know that there will necessarily be a single and well-aligned answer across each and every European country,” he said.

Uber Eats’ expansion into its largest untapped takeaway market in Europe follows a period of retrenchment. Last year it exited India and several smaller markets in eastern Europe, Latin America, the Middle East and Africa, after leaving South Korea in late 2019.

In several cases, Uber sold its struggling local businesses in return for sizeable stakes in the dominant participant. One of them, South Korea’s Grab, plans to soon go public via a special purpose acquisition company, or Spac, at a value of almost $40bn. Uber’s 14.3 per cent holding in the company would be worth more than $5bn at that value.

In the markets where it remained, Uber Eats has seen explosive growth during the pandemic. In a recent filing, it said food delivery had in March reached a $52bn annualised gross bookings run rate, up more than 150 per cent on pre-pandemic levels.

Just Eat Takeaway.com, whose acquisition of Grubhub is taking it into Uber’s home market of the US for the first time, has dominated online food ordering in Germany since Deliveroo withdrew from the country in 2019, leaving few competitors of meaningful scale.

Germany has become a vital source of profits for Just Eat Takeaway as it invests heavily to build up its “Scoober” in-house logistics network in the UK, where the battle for market share against Uber and Deliveroo has been intense.

Uber’s challenge to Just Eat Takeaway in its second-largest market by order volumes comes just a few months after Finnish delivery start-up Wolt first arrived in Germany. Jitse Groen, Just Eat Takeaway’s chief executive, has been so confident of its position there that in January he dismissed Wolt’s German launch as “possibly the worst investment case that I’ve seen in the [food delivery] business thus far”.

Gore-Coty said Uber had already signed up “dozens” of restaurants, including some large household-name chains. “If I judge by the experience we have in places like Spain or even in smaller countries like Netherlands or Belgium [where Just Eat Takeaway also dominates], I’m pretty convinced that this will translate into actually very rapid growth for Uber.”

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Flagship brand Gucci is bouncing back, but has yet to recapture the heat of its pre-pandemic boom times. Signs are growing that the French group will seek a transformational deal.

Kering’s flagship brand Gucci is starting to bounce back.

The brand saw 25 percent growth year-on-year in the first quarter, with consumers in Asia-Pacific and North America leading the recovery. Europe, where the brand is heavily dependent on tourists, continued to suffer.

Kering said it was “very happy” with the execution of a push to get the brand back on track, including investments in communications, clienteling and events as well as fewer (but bigger) runway collections and buzzy collaborations, such as crossovers with the North Face and Kering stablemate Balenciaga. Gucci helped support a “sharp revenue rebound” in Kering’s first quarter sales Tuesday, with overall organic growth of 26 percent over the prior year.

Compared to early 2019, the group’s last first quarter before the coronavirus crisis, sales were up 5.5 percent excluding currency shifts, despite the fact that many of its stores continued to experience shutdowns as the pandemic entered its second year.

While getting back above pre-pandemic levels is undoubtedly good news for the conglomerate, the group’s recovery is still lagging far behind some of its biggest rivals: last week, LVMH reported fashion and leather goods sales had jumped 37 percent over 2019, while UBS analysts expect Hermès to report a 19 percent jump.

Kering has other bright spots besides Gucci, as fashion fans have marvelled at its commercially (and creatively) successful revamps of Saint Laurent, Balenciaga and Bottega Veneta in recent years. But from a financial perspective, Kering still depends on the Florentine leather goods brand for the majority of revenue and over 80 percent of profit. The fact that the label has a history of boom-and-bust fashion cycles (such as before and after Tom Ford’s turnaround) means that it’s likely to dominate discussion about the group for the foreseeable future.

Unless, that is, Kering can finally pull the trigger on a major acquisition that would transform its profile.

There have been signs the company is eyeing a deal for years, which have intensified since the pandemic. Previously, the group tried to buy Versace (it was outbid by Michael Kors), as well as reportedly exploring deals with Moncler and Prada. While Kering has not commented on whether any specific approaches took place, in an investor presentation in February, chairman François-Henri Pinault confirmed the chatter. “We are looking closely at any opportunities that would make sense,” he said.

Last month, Astrid Wendlandt’s Miss Tweed website reported that Kering had made an approach to rival group Richemont, the owner of Cartier, Van Cleef & Arpels, and Chloé, and been rebuffed over the proposed terms. While unconfirmed, the news sent Richemont shares up by 4 percent.

The deal is one that analysts have speculated would make sense for years, as it would combine Kering’s expertise in fashion with Richemont’s in the fast-growing luxury jewellery sector, as well as e-commerce capabilities through its Yoox Net-a-Porter (YNAP) division.

While Kering wouldn’t comment on that specific report, chief financial officer Jean-Marc Duplaix dismissed recent M&A rumors as “pure speculation” on a call Tuesday — before reminding listeners in the same breath that Kering was well-positioned to make such a move. “Our deleveraged position gives us flexibility,” he said.

Whether or not Richemont turns out to be in play for Kering, the logic of a transformational move remains intact, especially as rival LVMH has further beefed up its scale in recent months, acquiring American jewellery giant Tiffany & Co. and investing in collections and communications to fuel fast-growing Dior.

But there are few deals that would appeal to the group. A brand needs to have sufficient scale to be worth Kering’s time and energy (sales of $1 billion seems to be the threshold). It also needs a clear brand platform, but not one that competes with any of the brands it already owns. Ideally, there would be no founders or hands-on family shareholders who would stay on to interfere with the group’s authority to appoint designers and chief executive officers following an acquisition.

And they want all of that at a price that doesn’t exceed their standards for “financial discipline” — a favourite Kering phrase.

Those tough constraints show why some of Kering’s previous M&A attempts have failed to come to fruition.

Still, a few brands could fit the bill. Burberry, with no controlling shareholder, is always for sale. Under designer Riccardo Tisci and CEO Marco Gobbetti, the British brand has refocused on luxury retail, cutting out mid-market department stores and revamping its offer to appeal to the streetwear set.

But Burberry’s more affordable department store lines were only discontinued in 2017, and that recent history could provoke flashbacks at Kering to a distracting detour into premium and lifestyle apparel. It took years for the group to disentangle from brands like Puma and declare itself purely a player in luxury again. Burberry may need to establish itself further as a true luxury brand before attracting one of the French groups.

Plenty of Italian brands remain independent and could be more open to a partner or buyer after the pandemic. Salvatore Ferragamo was exploring a stake sale, according to market reports, and Giorgio Armani has said he would consider taking on a partner in the business. But those brands have both been resistant to previous turnaround efforts, making them uncertain picks. And such deals could also involve leaving room in the business for the kind of strong-willed shareholder-managers that Kering has, until now, managed to avoid.

A famous founder might keep Prada from being a fit, too, should the family ever decide to sell. Even as the brand pursues a turnaround on its own with new co-creative director Raf Simons, it’s been placing its owner and designer Miuccia Prada at the centre more than ever, live streaming Q&A sessions with her on social media following each show. She’s one of the brand’s biggest assets—but making the brand fit Kering’s model could be a challenge so long as she and her husband, CEO Patrizio Bertelli, continue to animate the business.

Instead of chasing a big fashion deal, beauty and skincare is another space where Kering might expand, understanding that building up specific expertise in research and development, production and distribution for the category would be a steep climb on its own. Pinault has previously expressed frustration with license-holder Coty’s sluggish performance developing beauty for its Gucci, Balenciaga and Bottega Veneta brands. The right acquisition could put the group in a position to take back control of those licenses down the line.

Or the company might go in another direction entirely — getting into hotels, as LVMH did with its investments in the Cheval Blanc and Belmond groups, Christophe Cauvy, a partner at Intersection M&A suggests. Or leaning into e-commerce and technology. After all, the Pinaults’ group used to be a lumber company.

Whatever direction Kering chooses, there’s likely to be competition. After luxury sales fell an average of 23 percent during the pandemic, M&A in the sector is expected to heat up, as “the pandemic made some companies perhaps realise that scale matters more than before,” UBS analyst Zuzanna Pusz said.

But even after most independent brands took a hard hit last year, “it’s still a sellers’ market,” Cauvy said. “If Kering wants to do more deals they might need to become more flexible.”

Kering, for its part, denies the rush, saying there’s still plenty of ways to invest in scaling up its existing brands. “We are confident in our houses’ ability to grow in 2021 and beyond,” Duplaix said.

The executive outlined key changes at the company under his leadership during the group’s annual general meeting, where Nicolas Hieronimus was voted in as a director of L’Oréal’s board.

PARIS — At L’Oréal’s annual general meeting held Tuesday the group’s next leader, Nicolas Hieronimus, was confirmed, and a sweeping overview of the company’s evolutions and revolutions over the past 15 years, under Jean-Paul Agon, was shared.

During the meeting, which was livestreamed from L’Oréal headquarters in the Paris suburb of Clichy, it was revealed that 99.21 percent of company shareholders had voted in favor of Hieronimus joining the group’s board of directors.

Then following the AGM, the board appointed Hieronimus, currently deputy chief executive officer, in charge of divisions, as the company’s sixth CEO in its 112 years of existence, starting May 1. The board also decided that Agon, who has led the group since 2006, will continue to be L’Oréal’s chairman.

“I’m very confident at a time that I entrust to Nicolas Hieronimus the task of writing the next chapter of the great history of L’Oréal as of the first of May,” Agon said. “His track record in the company was a standard-setter, and gives him full legitimacy.”

Agon lauded Hieronimus’ “combined sensitivity to the needs and expectations of consumers, clear understanding of current trends, a passion for marketing, innovation and an obsession for excellence.”

“Lastly, and it’s key, he is a great team captain, an inspiring leader possessed of great energy for all these reasons,” Agon said. “I’m firmly convinced that he’s the best man to head your company. In the years to come, he will lead L’Oréal to new heights in full continuity with our strategy and values, whilst reinventing the group and adapting it to the great challenges of the world.”

Agon described this AGM as very special, since it would be the last at which he’d address shareholders as L’Oréal’s CEO. The executive outlined some key changes over the past 15 years, saying the company in 2006 was not the same as it is today.

“The group is far better balanced,” Agon said. “The center of gravity in terms of [L’Oréal’s geography] has shifted to the New Markets that represent almost half of our sales, in particular Asia Pacific, that’s become our number-one geography.”

China symbolizes the region’s steep growth trajectory.

“Fifteen years ago, it ranked ninth in our markets,” Agon said. “It’s now in second place. Our ambition is immense in this country that’s ready to become the world’s largest beauty market.”

Versus 15 years ago, L’Oréal is better equipped in terms of businesses and channels, too. In 2006, hair care was the company’s number-one product category.

“Today, skin care is the biggest and most dynamic category,” Agon said. “In terms of channels, the weight of our two largest divisions — Consumer Products and Luxury — are almost identical.”

The same is true for L’Oréal’s Professional Products and Active Cosmetics Divisions.

Under Agon’s lead, L’Oréal has enriched its portfolio through some 30 acquisitions, including of the Yves Saint Laurent, Prada and Valentino licenses in prestige fragrance, and Sanoflore and Logocos Naturkosmetik in the natural beauty space.

He maintains L’Oréal “brings together the best in the beauty universe.”

“L’Oréal has also changed scope in the financial and economic sense over 15 years,” Agon explained. “Sales almost doubled; profitability grew continuously and steadily, going from 15.6 [percent] to 18.6 percent of sales, and net profit was multiplied by 2.5, coming in at over 4 billion euros.”

Further, the group’s share price has leapt by more than 350 percent, and its market capitalization has quadrupled, to close to 200 billion euros. The executive underlined that L’Oréal has entered into the select club of the world’s 50 leading companies.

“Total shareholder returns are high — 13 percent over 15 years, 16 percent over 10 years and over 20 percent over three years,” Agon said. “If we’ve obtained such results, it’s because we began by defining a mobilizing strategic project for L’Oréal with the new mission Beauty for All, a self-renewed ambition to attract 1 billion new consumers, a new strategy — ‘universalization,’ that’s to say globalization [while] showing respect for differences.

“Lastly, we presented last year a new purpose: creating beauty that drives the world,” he said. “If your company has constantly strengthened its global leadership, it’s because we’ve devoted these past 10 years to inventing a new L’Oréal. We conducted in-depth transformations that were going to prove indispensable revolutions to succeed in the 21st century.”

The first of those he called “the digital and e-commerce revolution,” an opportunity accelerator.

“Our online sales were nonexistent 10 years ago. They accounted for over 7 billion euros in 2020,” said Agon, adding e-commerce is now the number-one market for L’Oréal, generating 27 percent of group sales.

“We emerged in less than a decade as the beauty e-commerce leader,” he continued. “We also reinvented our marketing model, thanks to data, social networks and over two-thirds of media spend.”

L’Oréal was the first consumer-goods group to acquire a company specialized in artificial intelligence and virtual reality: ModiFace, in 2018, which offers personalized beauty services and experiences for consumers. In 2020 alone, 1 billion virtual makeup tests, skin diagnostics and bespoke recommendations for L’Oréal products were made through the application.

“Our ambition is very soon to become the absolute champion of beauty tech,” Agon said.

Corporate responsibility and sustainability comprise L’Oréal’s second revolution.

“The protection of the environment was already a reality at L’Oréal, but we wanted to take it to the next level by launching in 2013 the program Sharing Beauty With All,” he said. “With this program, we’ve achieved a step change in the paradigm, from supply to packaging, marketing, formulation and production. It’s the full value chain that was upended in seven years.

“We reached the majority of the goals in this exacting program, and we’re going to exceed some very ambitious [ones], such as CO2 reduction. But we firmly believe we need to go further,” Agon said.

The group’s new sustainability program, L’Oréal for the Future, was launched during the coronavirus pandemic and represents an even more radical transformation the company wants to implement. It was conceived to respect the limits of planet Earth across the lifecycle of the company’s products.

“We’re going to devote 150 million euros to support vulnerable women and the environment — two causes that reflect the historic values and commitment of our group,” Agon continued.

On the personnel front, L’Oréal’s Share and Care program, launched in 2013, helped universalize best social practices and served as a model for the International Labor Organization.

“Thanks to it, our employees in 68 countries where we’re present benefit from the best standards in terms of health, parenthood and quality of work,” Agon said.

L’Oréal has intensified its efforts regarding diversification and inclusion, as well, with major improvements, especially on the gender equality front, for instance.

“We have strong, exacting ethical principles that guide our work,” said Agon, adding L’Oréal has been acknowledged for its actions. It is the only company around the world to have received a triple-A score from the CDP, for example.

In 2016, L’Oréal initiated its third revolution in the form of the Simplicity program, created to change the way the company works to meet new employee expectations.

Agon said if the group has been able to reinvent itself and adjust to major changes in the 21st century through such revolutions, it’s due to the fact that L’Oréal remains loyal to its identity with one main focus: the business of beauty.

“Only beauty, but all of beauty: The primacy of research to meet the need for extra quality, effectiveness, safety, responsibility; a balanced business model that creates value with a strong, solid financial situation; priority to people in social harmony, based on a bedrock of humanist and ethical principles, and a strong and unique enterprise,” he said.

Agon explained the transformations and reinventions have “made L’Oréal stronger, better equipped than ever to win, and make us very confident in the future.”

“This great confidence also comes above all from the quality and tremendous commitment of each of the 85,000 people working at L’Oréal,” he said. “If L’Oréal is the efficient and civic company that it is today, it’s thanks to them.”