TheChek News Flow

European bank mergers can succeed even though BBVA failed

This year is set to be the busiest in terms of deal value for the continent in more than a decade

Spanish bank Sabadell saw off a hostile takeover approach from larger rival BBVA last week, putting an end to a vicious 18-month battle. That must be disappointing for Carlos Torres, the BBVA chair who had aggressively pursued the deal. But not everyone who fought on his side need despair.

The most pessimistic take on the affair, put forward by some of Torres’s allies, is that Sabadell’s shareholders have not only shot down a good deal for themselves, but also caught any number of other potential banking mergers in the crossfire.

After all, Europe needs transformative cross-border tie-ups to compete with American investment banks and fund major long-term projects across the region. But if even a straightforward domestic combination can’t get past political opposition, what bank chief would be foolish enough to try?

BBVA played on these concerns during its campaign and there were signs policymakers in Brussels were listening, with the European Commission warning the Spanish government for trying to interfere. 

It is not wrong that Europe would benefit from more deals. But this one was ultimately undone by shareholders, not politicians. And while a combination might have made sense at the right price, it wouldn’t actually have benefited the continent much. The Spanish banking sector is heavily concentrated and fairly efficient, and most of the rest of BBVA’s business is focused on emerging markets. A deal would hardly boost Germany’s Mittelstand or keep the wolves of Wall Street from the door.

True, the noise around this high-profile failure could cast a psychological chill that goes beyond its practical impact. But BBVA’s failure does not really signal the impossibility of completing a bank acquisition. Rather, it shows it’s unwise to try to snap up a lender with a big retail shareholder base on a hostile basis while paying only a small premium — especially during tense regional elections.

Listen closely, and European bank M&A is actually drumming along quite well. This year is set to be the busiest in terms of deal value in more than a decade, with over €35bn of transactions completed or pending, according to LSEG data and Lex analysis. Multibillion-euro deals have been made in Germany and Italy, as well as a few cross-border combos such as French group BPCE’s €6.4bn acquisition of Portugal’s Novo Banco and the €7bn sale of Santander’s Polish arm to Austria’s Erste Group. 

Unicredit’s one-sided courtship of Commerzbank shows big deals are extremely difficult to get done — especially when the target company’s board isn’t keen — but it is not clear they are any harder than a week ago. And while going two steps forward and one step back might not be the most efficient marching rhythm, it eventually gets to the same place.

Europe’s defence boom takes to the high seas

Activity in the fragmented maritime sector is hotting up

Where money flows, corporate action follows. The sea change in European military spending has given rise to piecemeal acquisitions, joint ventures and fundraisings as companies attempt to trade and share capabilities. So far, the action has largely been focused on land and air equipment. But there are signs that activity in the maritime sector is hotting up. 

The latest example is Thyssenkrupp’s spin-off of its marine division, whose maiden voyage on Monday proved a remarkable success. Shares in the German conglomerate’s submarine and ship-making unit, ended the day at €81.10, valuing Thyssenkrupp Marine Services’ equity at €5.15bn. 

The carve-out — which leaves Thyssenkrupp as the majority shareholder with 51 per cent — enables the embattled steel conglomerate to take advantage of a propitious moment. Europe’s defence index has trebled since February 2022. Even assuming, boldly, that ongoing wars come to an end, Europe has to make up for decades of under-investment in fleets, tanks and other military kit.

TKMS sees its “attainable” market doubling to €61bn by 2033, based on proposed government spending on ships, submarines and associated technology. 

True, there are others competing for those euros and dollars. TKMS knows as much, having recently lost out to Japan’s Mitsubishi Heavy Industries for an order to build a fleet of Australian frigates, worth up to A$10bn ($6.5bn) in its first phase. But the company is well positioned, especially given its integrated offering comprising vessels above and below the sea, along with sonar and sensor systems.

This is borne out by TKMS’s €18.6bn order book; sure, this is for massive bits of kit that can take six years to build, but that number equates to 10 times 2022 sales. Consensus sees revenue rising by 50 per cent to 2033. Operating margins meantime have been lifted to more than 5 per cent and the group is guiding for this to rise to 7 per cent over the medium-term.

Consolidation is a deeper undercurrent in the industry. Naval defence is a fragmented market. Flagships include Italy’s Fincantieri, Europe’s largest shipbuilder, which last year bought defence group Leonardo’s submarine unit, Wass. Germany’s Rheinmetall last month stepped into the waters with a deal to buy privately owned Naval Vessels Lürssen; the tank and munitions maker wants to build “a naval powerhouse” in Germany.

That leaves the question open as to whether TKMS might — in future — buy or be bought. Thyssenkrupp has so far declined to participate: political vacillations last year stymied a proposed acquisition by US private equity firm Carlyle after lengthy talks.

Meanwhile, the unit’s strong standalone prospects are sufficient cheer for its parent. The day one performance of the demerged entity already gives it an equity value far above the €2bn-€4bn analysts had been pencilling in to their valuations of Thyssenkrupp. Yet with TKMS trading on 45 times this year’s estimated earnings — a 13 per cent discount to similarly-growing rival Fincantieri on S&P Capital IQ estimates — there is fuel in the tank yet.

University tuition fees in England to be linked permanently to inflation

Government promises ‘higher standards’ in higher education and ‘renewed focus’ on skills in long-awaited white paper

Ministers will permanently link tuition fee rises to inflation in England but restrict increases to universities that meet higher quality standards, the Department for Education said on Monday.

The long-awaited government white paper on skills and post-16 education also set out plans to address the funding shortfall in research, noting that the proposed changes “may result in funding a lower volume of research”.

The proposed reforms come amid widespread cost-cutting in higher education as providers come under mounting financial pressure from a long-term funding squeeze and a clampdown on immigration that has dampened international demand.

The tuition fee cap, which is set at £9,535 for the current academic year, would increase in line with forecast inflation for the next two years, with automatic increases to be legislated “when parliamentary time allows”, the white paper said.

However, fee rises would become “conditional on higher education providers achieving a higher quality threshold” to protect taxpayer money, it noted.

Education secretary Bridget Phillipson told MPs that it was right that universities delivered “the world-class education students expect if they are going to charge the maximum tuition fee”.

“These reforms will ensure value for money, higher standards across our universities and colleges and a renewed focus on the skills our economy needs,” she added.

Vivienne Stern, chief executive of lobby group Universities UK, said the decision to raise fees in line with inflation would “help to halt the long-term erosion of universities’ financial sustainability” following a decade of fee freezes.

The white paper also outlined proposals to strengthen the role of the Office for Students, enabling the sector regulator to “impose recruitment limits where growth risks poor quality” and toughen its management and governance conditions of registration.

Governing bodies must ensure they have “diverse skills and capability to oversee strategy, plan prudently, understand and manage risk”, should “not sign off unachievable plans” and should “challenge whether their organisation is specialising appropriately”, the policy document added. 

The OfS will also be given reinforced investigative powers to tackle abuse of the system by recruitment agents and poor quality provision by university franchises.

Universities will be encouraged to “specialise in areas of strength” through a more strategic distribution of research funding, and to explore “more consolidation and formal collaboration” to secure the sector’s financial sustainability.

Tim Bradshaw, chief executive of the Russell Group of research-intensive universities, welcomed the tuition fee announcement but urged the government to rethink the international tuition fee levy, details of which are to be set out in the Budget on November 26.

Last month the government announced it would bring back maintenance grants for disadvantaged students on priority courses. The reintroduction of grants, which were abolished by the Conservative government in 2016, will be paid for via a 6 per cent levy on international student fees.

The levy, announced as part of the immigration white paper in May, has come under criticism from universities, with sector leaders warning that the £621mn-a-year hit will lead to further redundancies.

The equivalent of more than 15,000 job cuts have already been announced in the past year, according to the University and College Union.

Acknowledging the flaws of the current post-16 education system, the paper vowed to take a “more joined-up approach across government” to deliver the industrial strategy and address the high number of young people not in education, employment or training (NEET).

The new system will provide greater flexibility through the Lifelong Learning Entitlement, a credit-based system that will unify higher and further education finance from January 2027, and the growth and skills levy that funds apprenticeships, with plans to allow employers to fund short training courses.

The proposals also included a new “stepping stone” qualification for students with lower attainment before they retake GCSE maths and English following widespread criticism of the current system that sees hundreds of thousands of teenagers resit these exams each year.

Comments from US president will ease concerns in Canberra that Washington was cooling on pact

Donald Trump has offered strong support for Aukus, saying the deal to help Australia obtain a fleet of nuclear-powered submarines would boost deterrence against China in the Indo-Pacific.

Sitting beside Australian Prime Minister Anthony Albanese at the White House on Monday, the US president offered his first public backing for the trilateral programme that his predecessor Joe Biden signed with the UK and Australia.

“We’ve worked on this long and hard, and we’re starting that process right now, and I think it’s really moving along very rapidly, very well,” Trump told reporters before his meeting with Albanese.

His comments will be welcomed in Australia amid concerns about a Pentagon review of Aukus launched by Elbridge Colby, the under-secretary of defence for policy who has been a public sceptic of the submarine deal.

John Phelan, the US secretary of the navy who joined the Trump-Albanese meeting, said the Pentagon was trying to “improve” the original Aukus framework to benefit the US, UK and Australia.

“We’re really trying to . . . make it better and clarify some of the ambiguity that was in the prior agreement. So it should be a win-win for everybody.”

But Trump later added: “There shouldn’t be any more clarifications because we’re just, we’re just going now full steam ahead.”

Under Aukus, the US will sell a number of Virginia-class submarines to Australia while the three countries work on a new vessel called the SSN Aukus that will not come into service until the end of the next decade.

Critics of Aukus in the US, including Colby, have voiced concern about Washington selling submarines at a time when American shipyards are struggling to produce enough to satisfy the US’s own demands.

Charles Edel, an Australia expert at the Center for Strategic and International Studies, said Trump had provided strong support for Aukus.

“While there have been questions raised about the viability of Aukus, and what exactly the Department of Defense review will say about it, Trump appeared to push those concerns aside, stating that there were only ‘minor details’ left to be worked out, and that Aukus was moving ahead ‘full steam’.”

Trump and Albanese also signed a rare earths deal that will see Australia help the US process the minerals. As part of the deal, the two nations will within six months each contribute at least $1bn to projects in their countries that will produce rare earths for buyers in the US and Australia.

Canberra had pitched the country’s rare earth resources as a bargaining chip in talks with the US, which is looking to secure more supplies of critical minerals from outside China for its defence and energy industries.

The agreement comes two weeks after Beijing unveiled a sweeping export control regime for critical minerals that angered the US. Trump has threatened to put an additional 100 per cent tariff on imports from China in response.

The president is expected to meet his Chinese counterpart Xi Jinping in South Korea on October 29 when the leaders attend the Asia-Pacific Economic Cooperation forum. Trump on Monday said he believed that he and Xi would agree on a “fantastic deal” at their meeting in South Korea.

“It’s going to be a great trade deal, it’s going to be fantastic for both countries, and it’s going to be fantastic for the entire world,” Trump said.

He said he believed that “China will come to the table and make a very fair deal” to avoid what the US president said would amount to a total US tariff rate of 147 per cent on imports from China.

But he also repeated his threat to impose additional tariffs and other countermeasures on China if the two sides cannot reach an accommodation.

“They threatened us with rare earths, and I threatened them with tariffs, but I could also threaten them with many other things like aeroplanes . . . because they can’t get parts for their aeroplanes,” Trump said.

He also said he would likely discuss Taiwan with Xi. China wants Trump to express opposition to Taiwanese independence, in what would be a shift away from the traditional line that the US does not support independence.

“When I’m in South Korea with President Xi, we’re going to be talking about a lot of things. I assume that’s going to be one of the things, but I’m not going to talk about that now,” Trump said.

Taiwanese officials are nervous about Trump’s upcoming meeting with Xi because of concerns that he might agree to a deal that undermines US support for Taiwan.

World’s biggest miner by market capitalisation locked in negotiations over iron ore with Beijing-controlled buyer

BHP has warned that it expects slower growth in China for the rest of the year but maintained a positive view of demand for commodities as it continues to hold talks with China over iron ore contracts. 

The Australian company, the largest global miner by market capitalisation, reported a 1 per cent decline in iron ore production to 64mn tonnes during the three months to September, due to maintenance upgrades of its facilities in Western Australia.

Its copper production increased 4 per cent while steelmaking coal production grew 8 per cent in the quarter. 

BHP has been embroiled in negotiations with China’s state-run iron ore buyer over the terms of future purchasing amid reports that the world’s largest consumer of iron ore has stopped buying some of the miner’s products.

Melbourne-based BHP has refused to comment on commercial negotiations with China Mineral Resources Group, which co-ordinates much of the country’s iron ore purchasing.

BHP made no reference to the talks in its production report but pointed to a slowdown in demand in the coming months. 

“Overall macroeconomic signals for commodity demand remain resilient, and global growth forecasts are moving higher,” said Mike Henry, BHP chief executive. “While we expect some deceleration in growth in [the second half] of [2025], in China we still expect GDP growth of [about] 5 per cent for the year.”

BHP shares opened 2 per cent higher following the release of the production numbers. The company holds its annual meeting this week.

The Australian company, which attempted to buy UK rival Anglo American last year, has increased its exposure to copper through acquisitions in Australia and South America in the past three years and has forged ahead with a major plan to produce potash in Canada as it has looked to reduce its reliance on iron ore.

In contrast, BHP scaled back its steelmaking coal operations with the downsizing of a mine in Queensland after the state imposed higher taxes on commodity companies.

Alexander Gerko will appeal against decision after court finds accounting firm refused services because of his nationality

A UK court has dismissed XTX’s claim against Mazars in a case that centred on the accounting firm’s refusal to work for the trading group because its billionaire owner was Russian.

The London-based trading group sued Mazars in August 2022 for breaching the UK Equality Act by discriminating on the grounds of race when it declined to work for XTX as Alexander Gerko held Russian citizenship.

Gerko renounced his Russian citizenship in December 2022, about 10 months after Moscow’s full-scale invasion of Ukraine, and is not the subject of any sanctions. He also holds British citizenship.

The UK County Court for Central London last week dismissed XTX’s case against Mazars, saying the accounting group at the time only refused to provide services in France and the US, not the UK.

However, the judge said if XTX had been seeking services from Mazars in the UK, “there would have been direct discrimination”.

“The nationality of Dr Gerko was why the services were refused,” the judge said, according to a copy of the judgment seen by the Financial Times. “There is no basis for saying it was reasonably necessary not to engage with XTX simply due to Dr Gerko’s nationality.”

On Monday, Gerko said the judgment “confirms that Mazars’ actions would have been considered race discrimination” if XTX had been seeking services in the UK. He said XTX is based in Britain, where most of its employees live, adding: “We fully intend to appeal the judgment.” 

“We were seeking a global consolidated payroll services provider (which includes also non-UK offices), it’s puzzling why it was determined that we were not seeking services in [the] UK,” Gerko said. 

The judge said “it is clear from the emails that XTX approached Mazars Global for a transfer of all payrolls in 5 countries including the UK”, but that the services being sought initially were for France and the US. 

XTX’s case against Mazars was brought after Russia’s invasion of Ukraine, when professional services groups faced pressure to refuse to work for Russian clients or companies with any perceived links to the country. 

Mazars declined to comment. The group is now known as Forvis Mazars after a merger deal in late 2023.

Gerko is one of the UK’s richest people, worth $11.4bn according to the Bloomberg Billionaire Index, and earned £682mn from XTX’s trading profits last year. He is also the UK’s top individual taxpayer, according to Sunday Times estimates.

Gerko has vehemently denounced Russia’s invasion of Ukraine, donated millions of pounds to Ukrainian charities, and called on the UK to expand its sanctions list. 

XTX makes money by using vast amounts of computing power to detect tiny margins on millions of trades across currency, debt, equity, commodity and crypto markets. It handles about $250bn worth of trades every day and uses 25,000 artificial intelligence chips to power its trading.

Harvard grad Jeff Yan’s trading platform is thriving on crypto fans’ love for anonymity and leverage.

When a crypto crash ricocheted across markets earlier this month, the spotlight landed on Hyperliquid, an exchange that handles more than $13 billion in trades a day with around 11 employees based largely in Singapore.

The two-year-old exchange is little known outside crypto markets but wildly popular among traders for offering anonymity, high leverage and giving away a token that has soared in value. Hyperliquid has no outside investors and generates more than $1 billion in annualized revenue, based on the trading volume and fees it discloses.

The platform drew unprecedented attention after the crash because it liquidated more than $10 billion in trades that day, potentially exacerbating the sell-off. Hyperliquid also came under scrutiny after two of its user accounts placed massive bets against the market just minutes before President Donald Trump announced a big increase in tariffs on China.

“Hyperliquid is extremely unique,” said Ash Egan, founder of Archetype, a crypto venture fund. “You don’t see it that often where successful founders make the decision to entirely self-fund” a startup before launching a token, said Egan, whose fund owns Hyperliquid tokens.

Jeff Yan, a 2017 Harvard graduate who grew up in Silicon Valley, created Hyperliquid in response to the collapse of FTX, a centralized exchange that held users’ assets. Hyperliquid is decentralized, meaning its algorithms match buyers and sellers, and its customers maintain custody of their own assets. Yan has grand ambitions for Hyperliquid, hoping it can trade all kinds of assets.

The exchange, developed by a team based in Singapore, doesn’t allow U.S. traders, but they can access it using virtual private networks. Nevertheless, Hyperliquid is growing fast–its trading volume is now equal to 10% that of a comparable product on Binance–the world’s biggest crypto exchange. Its growing size and use of derivatives is causing concerns it could accelerate a meltdown in the market.

Yan, a son of Chinese immigrants, went to math camps growing up and attended Palo Alto High School in the heart of Silicon Valley. He won silver and gold medals at the International Physics Olympiad, the most prestigious annual physics competition for high school students around the world. After attending Harvard University, he joined Hudson River Trading, a high-frequency trading firm in New York, as an algorithm developer but left after less than a year.

Yan is deeply technical and ambitious, people who know him say, and has attracted talented people to his projects.

His first startup, founded in 2018, was a prediction market that failed. He then set up a trading shop called Chameleon Trading in Puerto Rico, where he hired Denis Yarats, later a co-founder of artificial intelligence search engine Perplexity AI, and Jacob Jackson, now a researcher at coding assistant Cursor. The firm soon became a major trader. It never transacted on FTX because Yan didn’t trust the platform, Yan previously said.

When FTX collapsed at the end of 2022, Yan started building Hyperliquid. Instead of raising venture funding, Hyperliquid bootstrapped its growth by issuing its own token, HYPE. Major venture firms including Paradigm and Founders Fund expressed interest in investing in Hyperliquid, but it turned them all down, according to people familiar with the matter. Instead, it gave away 31% of the total supply of tokens to users based on their trading volume. Known as an airdrop, the giveaway attracted more users.

“When Hyperliquid started, the standard thing to do was raise big rounds from VCs and generate a lot of excitement — raising one round after another,” Yan said in a podcast interview on Wu Blockchain in August. “But that always felt kind of fake to me. That’s not real progress.”

The firm made HYPE even more attractive by directing most of the fees generated by the trading platform to buy outstanding tokens, reducing the supply and boosting its price. HYPE’s price jumped from $3.90 per token when it was issued last November to $38 currently. The value of HYPE tokens in circulation is about $10 billion, making it one of the most successful token launches in history.

The 310 million tokens Hyperliquid gave customers were worth $1.2 billion immediately after the airdrop. “It’s inspiring to see tens of thousands of community members secure life-changing wealth,” Yan tweeted a day after the token launch. Nearly all the prominent crypto funds—Paradigm, a16z, Pantera, Galaxy Digital, Hivemind, CoinFund—now own HYPE tokens, according to their disclosures and The Information’s reporting.

And Hyperliquid is attracting capital from U.S. stock market investors. A Nasdaq-listed U.S. company, Hyperliquid Strategies, in July announced plans to accumulate $888 million HYPE tokens, allowing investors to effectively buy the token like a stock. Bob Diamond, former CEO of Barclays, will be the company’s chair. The transaction hasn’t closed, however, and the stock has fallen 64% since the announcement. Another Nasdaq-listed stock, Hyperion DeFi, has bought 1.7 million HYPE tokens, worth $59 million based on the current token price.

Hyperliquid has attracted traders by offering them anonymity and high leverage. Most of the platform’s trading volume is in perpetual futures, highly leveraged derivatives with no expiration dates, which are not available on U.S. platforms.

Since Hyperliquid just provides trading software but doesn’t act as a broker, it’s not responsible for verifying users’ identities. Trading by anonymous users created a storm of speculation on Oct. 10 when two accounts bet the market would fall just minutes before Trump’s surprise announcement of 100% tariffs on Chinese goods. Traders speculated that whoever made the bets must have been tipped off by someone at the White House.

“Hyperliquid is benefiting from the fact that there’s a lot of people who want to get anonymous trading,” said Matt Zhang, founder of crypto fund manager Hivemind.

Those two bets paid off dramatically when the crypto market tumbled following Trump’s announcement. High leverage accelerated the sell-off. Hyperliquid’s algorithms forced traders to close out their positions to protect the exchange from big losses. More than $10 billion worth of trades were liquidated on Hyperliquid that day, out of a total of at least $19 billion that day, the largest in the industry’s history, according to CoinGlass, exacerbating the market sell-off.

Traders who use leverage always risk potential liquidation when markets fall. Like other crypto exchanges, Hyperliquid forcibly closed trades during the market turmoil, leaving many traders surprised and disrupting their hedging strategy. Hyperliquid is not regulated globally, which means users have little recourse if anything goes wrong.

Hyperliquid discloses little information about its core team. Besides Yan, most members are anonymous or use pseudonyms, including another co-founder listed as “iliensinc” who also went to Harvard. A core contributor who goes by the name Xulian is responsible for go-to-market strategy. Hyperliquid employees came from California Institute of Technology and Massachusetts Institute of Technology and previously worked at Citadel, Hudson River Trading and Airtable, a maker of productivity apps, according to Hyperliquid’s website.

Yan spends most of his time working on improving Hyperliquid’s blockchain and encouraging companies to launch products on it. He often responds to developers’ questions on Telegram within 24 hours.

“He doesn’t have a board of directors. He doesn’t have investors calling him up and yelling at him and telling him he needs to do this or do that,” said David Schamis, founding partner of private equity firm Atlas Merchant Capital, who will be the CEO of Hyperliquid Strategies, the public company that plans to hold Hyperliquid tokens. “It’s great because he can keep his mind totally focused on the mission.”

Hyperliquid’s mission goes beyond crypto. It says it wants to “house all finance” by letting people launch a range of investment products on its blockchain. “The idea is that today on Hyperliquid, you really only can trade crypto perpetuals, but eventually you might be able to trade public equities, indexes, private companies, commodities and maybe even interest rates,” said Alvin Hsia, co-founder of Ventuals, which is developing a way for investors to bet on valuations of private companies such as OpenAI and Anthropic. It’s “manifesting their vision of becoming the everything exchange,” he said.

For instance, another company, Trade.XYZ, recently launched the perpetual trading of an equity index on Hyperliquid, which allows traders to bet on prices of stocks using leverage without having to own the actual shares.

For Yan, Hyperliquid will not have succeeded until it breaks out of crypto and reinvents how people interact with finance. “If Hyperliquid fails, I think by and large it will likely be because we as a community didn’t build something of real value for the world,” Yan said on a panel at a Singapore conference this month.

That also means Hyperliquid will be pushing regulatory boundaries. While it operates offshore, Hyperliquid has shown some interest in U.S. crypto policymaking. In May, it advocated for the role of decentralized exchanges in a letter submitted to the Commodity Futures Trading Commission. The letter was in response to the agency’s request for comment on perpetual-style derivatives.

If Hyperliquid wants to enter the U.S. market, it could consider buying a licensed entity or start its own, although it would likely have to reduce the leverage it offers.

Hivemind’s Zhang said much of what Hyperliquid does will eventually be allowed in the U.S. “I think people are still having the Biden administration hangover—people haven’t really realized how much has changed in the last 10 months,” he said.

Luxury group will have less debt and better focus after selling beauty division to L’Oréal

Under its old leadership, Kering KER 4.72%increase; green up pointing triangle was carrying too much debt in service of an overly ambitious strategy. A 4-billion-euro check, equivalent to $4.66 billion, from the sale of its beauty division puts those worries to rest.

Shares of the French luxury company rose 4% on Monday after it said it was selling its beauty business, confirming a Wall Street Journal report over the weekend. The move signals that Kering won’t seek to match the end-to-end scale of rival LVMH in fragrances and cosmetics, focusing instead on its core luxury brands such as Gucci and Bottega Veneta.

Under the terms of the all-cash deal, L’Oréal will buy perfume brand Creed, which Kering purchased for €3.5 billion two years ago. L’Oréal also gets a 50-year license to sell perfume and cosmetics for Kering’s brands Bottega Veneta and Balenciaga, as well as the license for Gucci once a pre-existing agreement with Coty expires.

If all of the proceeds from the L’Oréal deal are used to pay down debt, Kering’s net borrowings will fall to 1.5 times 2026 earnings before interest, taxes, depreciation and amortization, down from 2.5 times before the deal, based on Citi estimates.

This level is more manageable for Kering, whose core business is performing badly at the moment. Gucci, which typically generates two-thirds of the company’s operating profit, is in the doldrums. Kering’s share price has halved over the past four years.

The deal shows investors that Kering’s new boss Luca de Meo, who comes from the auto industry, is serious about repairing the company’s balance sheet and doesn’t mind reversing decisions made by Kering’s founders, the Pinault family.

De Meo has already deferred plans to buy the remaining 70% of Valentino that Kering doesn’t own. It has also been selling stakes in luxury properties in Paris and New York to raise cash.

The plan was for Kering to use Creed as a foundation to build out a fragrance and makeup business, but the sale effectively ends that.

Creed is very profitable and was one of the company’s best performers in the second quarter, growing sales 12% compared with the same period of last year. But Kering overpaid for it in 2023. The €3.5 billion price tag represented 14 times sales, Bank of America estimates—a much higher premium than other beauty deals.

What is more, a niche brand like Creed doesn’t yet have the infrastructure needed to build a serious global beauty business without heavy investment. The retail network for perfume and makeup is fragmented, so companies need scale to offset the high fixed costs of manufacturing and distribution, said Luca Solca, luxury analyst at Bernstein.

LVMH, the world’s largest luxury conglomerate, has a multibillion-dollar Christian Dior beauty business and can afford to run its own beauty operations in-house. It launched a range of $160 Louis Vuitton lipsticks in August and will keep a tight leash on manufacturing and distribution. Brands like Prada that don’t have established beauty businesses usually opt for licensing agreements with global giants such as L’Oréal or Estée Lauder.

Luxury companies want exposure to the category. The average selling price for perfume and cosmetics is lower than for clothing or handbags, which helps brands to attract a wide base of consumers. But Kering will get exposure to the business through the royalties it will collect from L’Oréal. Licensing agreements typically pay fees worth 6% to 8% of sales.

Most important is that shedding its beauty ambitions will allow Kering to focus on what would really make it shine: nursing Gucci back to health.

Kering chief vows rapid overhaul after sealing €4bn beauty deal

Luca de Meo says agreement with L’Oréal will be first of several big moves to refocus luxury group on Gucci turnaround

Kering’s new chief executive has vowed to make sweeping changes in an urgent bid to refocus the luxury group on fashion, as it announced a €4bn deal to sell its beauty operations to L’Oréal.

Luca de Meo signalled that he planned to make several big changes to the Gucci-owner, one of the world’s top luxury groups, saying he had moved to seal the beauty deal “as quickly as possible” and promising that “you’ll see others”.

The luxury sector enjoyed a boom during the pandemic, driven by housebound consumers spending more on high-end goods and huge growth in the Chinese market, but has since been hit by consumers reining in spending and a faltering Chinese economy.

De Meo, brought in from Renault where he led a large turnaround of another of France’s top listed companies, said his top priority was to refocus Kering on its fashion brands, notably Gucci. As well as beauty and fashion, the group also sells eyewear, while its jewellery houses include Boucheron.

“The urgency is to focus on the things . . . where we have a critical size and skills. That will help me lighten the boat and be able to focus on the relaunch of fashion brands,” de Meo told the Financial Times in an interview on Monday after Kering announced the sale of its beauty business.

He added that he wanted to “inject more speed into some of our decisions”.

The group’s flagship label — which accounts for about half of its sales and two-thirds of profits — has fallen out of favour with consumers in a challenging luxury market. It also suffered from over-dependence on China when demand in the country slowed.

Under the terms of the deal, L’Oréal is buying perfumer House of Creed, as well as 50-year licences to develop and sell fragrances under the Gucci, Bottega Veneta and Balenciaga labels. The French beauty giant will pay undisclosed royalties to Kering in return.

The talks, which had begun before de Meo arrived from Renault, sped up from August, according to people with knowledge of the situation.

Kering’s chief said he remained “pragmatic” with regard to other potential asset sales, including a possible disposal of its successful eyewear division.

“I don’t want to close the door because we try to be very open,” de Meo said, before highlighting that Kering’s eyewear business was important to some of its most valuable clients and that it was the industry leader on the highest-end segments.

Kering’s shares were up 4.1 per cent on Monday afternoon, extending a rally of more than 80 per cent over the past six months, on the back of hopes that de Meo can turn the group around and that the broader malaise in the luxury industry is easing.

“I’ve always believed that speed is important in modern business,” said de Meo.

“As soon as I saw that I had this opportunity, I tried with Nicolas [Hieronimus, chief executive of L’Oréal] to work so that we could conclude [the deal] as quickly as possible. And you’ll see others,” he added.

UBS analyst Zuzanna Pusz said the deal would help Kering reduce its debt, thus tackling “one of the biggest investor concerns”.

Pusz calculates that the proceeds could reduce Kering’s net debt from 3.1 times earnings before interest, tax, depreciation and amortisation to roughly 2 times, which may outweigh impairments that the group has taken on parts of its beauty business. Kering acquired Creed for €3.5bn only two years ago.

For L’Oréal, the deal marks its biggest-ever acquisition. Hieronimus said it would cement its status as the market leader in high-end beauty, and that L’Oréal would focus its efforts initially on developing Creed.

L’Oréal’s chief said in an interview that he hoped to almost triple Creed’s annual revenues to €1bn “fairly quickly”. The group’s shares edged up by 0.3 per cent on Monday.

L’Oréal will not get its hands on the licence for Gucci, which is expected to ultimately prove the most valuable, until a deal with beauty group Coty expires in 2028.

“Obviously, having the opportunity, when it is legally possible, to recover the Gucci brand was one of our motivations,” said Hieronimus. 

L’Oréal has form for growing high-end beauty brands. Revenues at Aesop, the upmarket soap maker it bought two years ago for $2.5bn, increased by about 10 per cent in 2024, according to one person close to the business.

The French group, which holds the beauty licence for Yves Saint Laurent, another Kering brand, generates about €3bn in annual beauty revenues from it, according to Hieronimus. That is slightly above YSL’s €2.9bn of fashion sales last year.

This implies that there is substantial opportunity to grow Gucci’s beauty range, which Hieronimus said generated only about €600mn in revenues last year, compared with the label’s €7.7bn of fashion revenues.

“When you look at the positioning of Gucci in this segment, there is room for improvement,” acknowledged de Meo. 

Spanish fragrance and fashion group Puig also took an interest in Kering’s beauty division, according to two people with knowledge of the situation. Puig declined to comment.

But in the end, the people said, the deal with L’Oréal offered a more logical and expansive partnership.