Is O'Reilly's move mere aspiration?

Is the announcement by Waterford Wedgwood's chairman and largest shareholder, Dr Tony O'Reilly, that he was considering a bid for Sara Lee Corp's Coach leather goods business, and the watch-maker, Jaeger-LeCoultre, aspirational? Or is it a realistic judgment of the group's bid capabilities?

A takeover of the two companies would treble its size. Waterford Wedgwood "has just got to make two or three really important takeovers" he has said. "My long-term ambition is to make it a luxury goods company that represents the best of the best in the world." Both companies are open to bids; but Coach looks the more interesting, and more attainable. Coach is in the process of an IPO with the flotation of a 20 per cent stake. Jaeger-LeCoultre is part of Les Manufactures Horlogeres (LMH), the luxury watch subsidiary of the German Mannesmann, that has come on the market following the Vodafone AirTouch takeover; it has a number of interested parties which are much larger than Waterford Wedgwood.

Coach is to raise $140 million in the share sale, possibly before the end of the year. That would place a value of $700 million on the company; a similar market value to Waterford Wedgwood's. However, if the Coach strategy is pursued, the remaining 80 per cent would not come up for sale until some time after the flotation, at which time it could be valued at some $1 billion.

Coach makes handbags, gloves, outerwear and scarves and will trade on the New York Stock Exchange, according to filings with the Securities and Exchange Commission. The document said Sara Lee is to focus on brands that are market leaders such as Sara Lee baked goods and Ball Park franks, undergarments including Hanes T-shirts and L'eggs hosiery and household product such as Kiwi shoe polish.

But Coach has an ambitious expansion programme. It has 106 stores which generated sales of $500 million in 1998/9. It plans to add 50 stores over a three-year period, and revamp its existing stores. The plans also include new products, including products for pets. And outside the US, it is looking to the Japanese market where there is a higher per capita spend on handbags. This company would fit in nicely with Waterford Wedgwood's image of a luxury goods group. Although Waterford Wedgwood is not in the leathers market, Coach could use the Waterford Crystal and Wedgwood labels to enhance its product range. Sara Lee hopes to sell the remaining 80 per cent stake within 18 months of the IPO. Obviously if Dr O'Reilly were to convince Sara Lee to sell now, rather than later, Waterford Wedgwood would have to pay less. Also, it could benefit from the planned expansion at Coach. And Wedgwood which is very strong in Japan, could help the US company's expansion there. There is a formidable line-up of suitors to take over LMH with LVMH Moet Hennessy, Gucci Group and Swatch Group, reported to be interested. Apart from competition from these much larger groups, the shareholder structure of LMH could make a deal difficult. LMH owns International Watch Co and Lange & Soehne, as well as a 60 per cent interest in Jaeger-LeCoultre.

Audemars Piguet, a luxury Swiss watch maker, owns the remaining 40 per cent. Crucially Cie Financiere Richemont AG has said it has an agreement with Audemars Piguet to cooperate with the sale by Mannesmann of its LMH business. No details of the deal have emerged. However, market sources have indicated that the interest in LMH could push up the price tag for Jaeger-LeCoultre to $900 million.

That, in conjunction with Coach would be too much for Waterford Wedgwood to digest particularly for a group with net debt of €311.8 million at the end of 1999. The group reckons it could make acquisitions in the $200 million to $500 million range without raising new funds. That would not be sufficient to buy Coach on its own. Dr O'Reilly, in the past, has not allowed traditional financial constraints to curb his corporate goals. Recognising these constraints he has spoken of the possible issue of convertible preferred stock or various types of warrants. While Waterford Wedgwood has made great strides, capitalised at just €775 million, it needs a big leap, to put it more firmly on an international footing.

Its shares have only half the rating of companies such as Gucci (the death of Italian banker Enrico Cuccia over the weekend has sparked a swirl of speculation about the future of his empire), and if it had a better rating it could use its paper. However, good luxury brands don't often come on the market, but when they do, they need to be grabbed, provided it is financially prudent to do so.