Features - Financial
NOVEMBER 18, 1999
LVMH and Prost Grand Prix
BY JOE SAWARD
The group, which is estimated to be worth around $7.5bn now includes most of the top champagne houses, fashion names such as Christian Dior and Givenchy and other luxury goods firms such as the recently-purchased TAG Heuer watch company. This vast empire has been pout together in the course of the last 20 years by Bernard Arnault, who is known as one of France's most notorious corporate raider.
It has to be understood that this is not a sponsorship deal in the traditional sense. There are no plans for any of the LVMH brand names to be seen on the cars - although this may follow as the company's interest in Grand Prix racing develops. Arnault intends to use the involvement with Prost Grand Prix to MAKE money.
How is he going to achieve that?
The logic is interesting. Arnault seems to think that there is a way of exploiting the glamorous and romantic world of Grand Prix racing in terms of sales. It is taking the idea of merchandising to a new level. Michael Schumacher and his management may be satisfied with selling caps and teeshirts but Arnault and Prost intend to create an entire fashion label called Prost. And given the luxury goods which Arnault is used to you can be fairly certain that there will not be any teeshirts in the product range.
Arnault is sufficiently confident in the idea that he has invested around $12m in the deal - and for this he has acquired a 10% shareholding in the Prost team.
There is more than a little risk involved in the deal but Arnault's investment is the latest in a strong of purchases in F1 by venture capital companies. It started in the autumn of 1998 with the announcement that Warburg Pincus & Co had bought a 40% shareholding in Jordan Grand Prix. It was followed by a similar investment in Arrows by Morgan Grenfell Private Equity Ltd (the investment banking arm of Deutsche Bank AG). The financial men had looked at the F1 figures and had concluded that owning a part of a team was a very good way to make money. The Prost deal with Louis Vuitton is not with the main LVMH company but rather with its investment capital subsidiary LV Capital. This organization has been given the task of helping Arnault spend all the money he is making by investing in new businesses and making still more...
It was only last summer that LV Capital began to make much of an impact under the leadership of Daniel Piette, but in recent months he has been very active, buying a stake in the US clothing company Gant, purchasing the famous British shirt making firm of Thomas Pink and investing in Prost.
The interesting thing about the Prost deal is that it is not simply a passive investment. The two companies have launched a joint venture called Prost Design, with the intention of selling Prost-branded products around the world.
Much of the credit for the LVMH deal must go to the merchant bank Credit Suisse First Boston (CSFB) which was contracted by Prost in May to "develop the team's international financial strategy". The intention was clear for the outset. CSFB was there to raise money for Prost. Throughout the summer the bank's representative with the team Peter Miller has been showing American high-rollers around the paddock, trying to convince them to part with cash but, at the same time, higher up the CSFB ladder other plans have been hatched. The ultimate aim is to build up Prost so that it can eventually be taken to the stock market.
CSFB, the investment banking unit of the Credit Suisse Group, is a famously aggressive (and successful) operation. In the last couple of years it has tripled in size as it has built a strong reputation for organizing IPOs and mergers. The merger work is particularly impressive with the firm having been involved in the mergers between Raytheon and Hughes, Boeing and McDonnell Douglas, Daimler-Benz and Chrysler and AT&T and TCI. CSFB decided not to invest directly in Prost but decided instead to find a better partner for Prost. It concluded that LVMH was a perfect fit.
Somewhere in the middle of all this dealing was Prost's "close business adviser" Julian Jakobi.
Jakobi was one of the early members of Mark McCormack's International Management Group and he has been looking after Prost's business interests since 1981. In 1992 he left IMG to become head of Ayrton Senna Promotions, setting up the hugely-successful Ayrton Senna Licensing operation in the course of 1993 and 1994 selling Senna-branded goods.
It was decided that in order to build up the Senna brand image it would be best to concentrate on high-quality products. And so Ayrton Senna Licensing began selling the Senna trademark to luxury yacht makers, high-quality pen and watch manufacturers and high-technology companies selling bicycles and motorbikes. Items were only added to the Senna collection of merchandise if they were considered to fit in with the image which the company wanted to promote.
When Senna was killed in 1994 Jakobi stayed on with ASP and it is a little-known fact that when Prost linked up with Prost again in 1995, the Frenchman was actually a client not of Jakobi himself but of the Senna organization. Prost was being managed by his old rival's organization...
The Villeneuve brand was aimed at a very different audience to that of Senna with a young, slightly rebellious, cosmopolitan and high-technology image being adopted. Villeneuve's dyed hair and nonconformist views could be harnessed and sold to dull corporations who were trying to sell products to the younger generations.
Jakobi eventually fell out with BAR but has retained his links with Prost and he will be one of the important decision-makers when it comes to defining the Prost brand.
"It is still very early days yet," says Jakobi. "Prost and LV have set up a joint venture called Prost Design. The aim is to develop and exploit the Prost brand. There are two sides to that as there is Alain Prost, the four time World Champion, and there is also Prost Grand Prix."
Why would anyone buy Prost-branded goods?
"Because," says Jakobi, "the last really successful internationally-known French sportsman to build up a successful international brand was Rene Lacoste. There is no reason why Prost could not do the same thing although the product range would probably be a little different."
Lacoste was a famous tennis champion in the 1920s - the World's number one in 1926 and 1927 - who gained the nickname "Crocodile" in the United States after he won a crocodile skin suitcase in a bet with another tennis player. In 1933 he registered the Lacoste name and the famous crocodile brand and began producing polo shirts and tennis clothing. The La Chemise Lacoste company was a huge success.
Lacoste proves that sport sells clothes and this has been shown in recent years in France with the success of the Eden Park fashion line, started by rugby player Frank Mesnel and a similar merchandising operation run by another rugby player Serge Blanco.
Both Piette and Jakobi think that the Prost brand can be much bigger than these. Defining exactly what that brand stands for and how to make money out of it will be an interesting exercise.
"Alain Prost's reputation as a champion is wellknown throughout the world," says Piette. "We aim to combine the Prost name with our considerable brand development expertise, extensive knowledge of retail and global distribution network to achieve considerable success with Prost-branded products.
The Prost image and the target audience has yet to be fully defined but it is likely that the aim will be to sell Prost goods to successful young entrepreneurs with an international outlook.
"I can imagine that we would have such things as clothing, accessories, toiletries and so on," says Jakobi, "but there is also a strong technical element as well so we may have some similar products to those in the Senna range. We will have to wait and see."
Certainly, LVMH can call upon the top designers and the rumour is that French designer Azzedine Alaia may be involved in the design of the Prost range.
The deal with Prost is not a sponsorship but it is more than a merchandising operation. Perhaps most importantly it is a philosophical statement by Prost who has always wanted to be seen to be an international team with a French flavour, rather than a French team. When he bought the old Ligier team at the start of 1997 Prost said he wanted to give the team a new image. Ligier had been kept afloat for years because of Guy Ligier's connections with the French government-controlled companies such as Elf, cigarette maker SEITA (which owned the Gitanes and Gauloises brands) and Lotto, the national lottery. Prost wanted to stay away from such affiliations and raise money from privately-owned French companies with international ambitions. He continued with the SEITA - which had been privatized - but found new support from Canal Plus, Alcatel, Bic and Sodexho. None of them were huge deals but they were a sign that Prost wanted to be seen to be independent of all political interference. The chief executives of each of the new sponsors were men who did not feel they had to rely on the French government for help - as many French firms do. They were men like Pierre Bellon (Sodexho), Serge Tchuruk (Alcatel), Bruno Bich (Bic) and Pierre Lescure (Canal Plus) who went out and did deals on the international scene. They were go-getters.
"I like to be independent," he explained. "This way I know I will be able to do it if the government changes. It is impossible to have a 100% French team. It would be too political. It is my team and my aim is to have a winning French team, based in France, but I want it to be international and some of my sponsors are not going to be French."
Three years on, Prost is beginning to develop that philosophy. The team has hired an increasing number of international engineers. He has hired a German driver rather than enlisting the services of a French rising star like Stephane Sarrazin. It seems that when the current Peugeot engine deal runs out, Prost will be getting Mercedes-Benz engines.
And now he has landed a deal with the King of the French Go-Getters - Bernard Arnault. And he has done it without selling space on his cars and without having to part with a large stake in the team.
Having Arnault as a partner is a dangerous business but having him as an ally is a huge advantage. Arnault demands success. He was invited to be an investor in LVMH in the late 1980s, not long after Louis Vuitton merged with Moet Hennessy. At the time Louis Vuitton boss Henry Racamier who battling for control of the company with Moet Hennessy's Alain Chevalier. Racamier wanted some support and invited Arnault to join up. He expected him be a docile investor but very quickly Arnault built up a controlling interest in the company. Chevalier was elbowed out of the way and after a brief battle Racamier followed him...
It is a danger which Prost will have to be aware of in the years ahead but at the moment he is convinced that the alliance will be successful.
"You know," he says, "they did some opinion polls in France a couple of years ago asking what people thought were the important things in life. The result was unbelievable. They said sporting results. People like to win."
Alain is hoping that they like buying things from winners as well...
Alain Prost says that the deal with Louis Vuitton Moet Hennessy is a brilliant one for his team. It will help him to find top level sponsors who wish to be associated with luxury goods. It may even help him to conclude an engine deal with Mercedes-Benz. That is certainly believed to be part of the philosophy behind the deal. Many of the modern sponsorships are created on the back of business-to-business deals. Who knows? Mercedes-Benz may soon introduce a range of Louis Vuitton luggage to go with its top-of-the-range models...
At the moment no-one is talking much about how the deal will develop except that it will develop.
"We have long considered the potential of expansion beyond motor racing," says Alain, "and in LV Capital we have found impressive expertise in this area combined with a level of professionalism which gives us real confidence in the success of the venture."
Branding and professional merchandising are areas in which Formula 1 teams have made little progress to date. What efforts there are are fragmented. Things are beginning to happen now but the sport is still a very long way behind American sports which have been generating billions of dollars a year selling merchandise and memorabilia to the fans. In 1995, for example, an estimated $11bn was spent on US sport merchandise. It is the impressive figures from America which have led retailers to look for more sports into which to expand, knowing that the US market - which has trebled in size in five years - is just the tip of an international iceberg. Europe, Asia and Latin America are all beginning to follow the American lead.
Formula 1 is perceived to be one of the most exciting and glamorous sports. It should be a powerful selling tool.
"You know," said a Formula 1 journalistic colleague recently, "if you could take the smell of money and mix it with the smell of the Nomex racing overalls, you could create a very powerful perfume. It would like selling sex in a bottle!"