Turning 17 Cents Into $200 Billion

Hello! This is Deep Pockets #15.

Only three people in history have created fortunes that topped $200 billion without having to adjust for inflation. Those three people are:

• Jeff Bezos

• Elon Musk 

• Bernard Arnault

In the last few years, those three tycoons have traded back and forth as the richest person in the world.

When you look at those three names, does one feel a bit weird?

Put it this way:

Jeff Bezos and Elon Musk are two of the most famous people on the planet. Everyone knows Jeff earned his fortune from Amazon, and Elon earned his fortune from Tesla and SpaceX.

I would wager that half the people reading this newsletter - a newsletter whose audience is very interested in extreme wealth - couldn’t name the source of Bernard Arnault’s fortune. I would also bet that most people reading this newsletter couldn’t pick Bernard out of a lineup.

Isn’t that a bit bizarre? He’s one of the three richest people on earth, sometimes the #1 richest, and he could probably walk around most cities without being recognized.

So, let’s talk about Bernard Arnault. A guy who has never really created… anything. He’s never launched a brand or invented a product. And still he somehow flipped one franc (less than a dollar) into one of the largest private fortunes of all time…

DEEP DIVE: How Bernard Arnault Flipped $15m into $200b

Ok, let’s just get this out of the way.

For those who have no idea what Bernard Arnault looks like, here is a recent photo:

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Actually, that was a test. That’s Bernard’s biggest rival, fellow French billionaire François Pinault.

Pinault parlayed a successful family timber company into owning Gucci, Brioni, Balenciaga, and Yves Saint Laurent. He’s also Salma Hayek’s father-in-law.

Be honest, did you know I was testing?

For real, this is Bernard Arnault:

Bernard Arnault was born on March 5, 1949, in Roubaix, France. Bernard’s mother’s father was the co-founder of a civil engineering firm called Ferret-Savinel. His father took over Ferret-Savinel from his father-in-law, and in 1971, after graduating from France’s top engineering school, Bernard went to work for the family company.

For about a half-century up to that point, Ferret-Savinel was almost exclusively an industrial civil engineering company. They built highways and government buildings. It wasn’t a sexy business, but it was steadily profitable and gave the Arnaults a nice upper-class life. Ferret-Savinel also had a small division that built residential homes.

After working at Ferret-Savinel for just three years, Bernard Arnault was extremely bored and facing a crisis. Did he really want to spend the next half-century babysitting a low-growth government construction contractor?

No.

In 1974, the 24-year-old Bernard convinced the family to sell Ferret-Savinel’s crown jewel, the industrial division, and go all-in on residential real estate construction. It took a few years, but the newly-oriented venture eventually carved out a nice little niche building vacation homes in places like the South of France.

In 1981, France elected Socialist leader François Mitterrand as President. Mitterrand’s Socialist Party proposed to make over 100 reforms, many of which were aimed at taxing the wealthy. The most notable was called the “Impôt sur les Grandes Fortunes,” which literally translates the “tax on the big fortunes.”

Unhappy with his future prospects as a wealthy person in France, Bernard uprooted himself and moved to America.

Bernard’s actual business experiences in America were unremarkable at best and unsuccessful at worst. He mainly built condos in Palm Beach, Florida. Not fancy, enormous oceanfront towers. Basic suburban 4-plexes and triplexes.

He did have one extremely good stroke of luck in America though, but it had nothing to do with his actual business. It had to do with his next-door neighbor.

For whatever reason, when he moved to America, Bernard decided to live in New Rochelle, New York. Purely by random chance, his immediate next-door neighbor was a guy named John Kluge. That name may not be familiar to many people today, but in the mid-1980s, when he was living next to Bernard, John Kluge was the richest person in America.

Decades earlier, John Kluge rolled up a dozen radio stations into the publicly-traded Metropolitan Broadcasting Company. He then bought a bunch of TV stations and an outdoor advertising company called Metromedia. He rebranded the entire organization as Metromedia.

In 1984, at a time when his next-door neighbor was the 35-year-old Palm Beach condo builder Bernard Arnault, John Kluge took Metromedia private (bought out all the public shareholders) in a “leveraged buyout.”

With a leveraged buyout, also known as an “LBO,” someone borrows a huge amount of money to buy an asset, for example a publicly traded company. The buyer typically then sells off assets and reduces costs (usually via layoffs) to pay down the debt as fast as possible to avoid huge looming interest payments on the debt.

In 1984, John Kluge borrowed $1.1 billion to take Metromedia private. He quickly sold off the radio division for $300 million and the outdoor advertising division for $700 million. Then, just two years later, he fell into a pot of gold. In 1986, Kluge sold all of his television stations to Rupert Murdoch for $4 billion. That sale made John Kluge the richest person in America. On October 9, 1986, Rupert relaunched Kluge’s former stations as Fox.

Bernard watched in utter amazement as his next-door neighbor flipped himself into the richest person in America using a billion dollars of someone else’s money. These types of business moves were simply unheard of in France. Frankly, they were just becoming popular in America. For better or worse (mostly worse), by the end of the decade, the American “corporate raider,” aka the “barbarian at the gate,” would be an infamous and controversial cultural icon.

Using the lessons gleaned from his neighbor, Bernard put feelers out back in France that he was looking for an asset to buy. As it happened, the French government controlled a company called Boussac Saint-Frères. The government took control of Boussac Saint-Frères after it fell into bankruptcy TWICE, first in 1978 and again in 1981. The bloated conglomerate employed 20,000 people and was costing the French government $50 million+ a year to operate.

Tapping some of his wife’s family connections to the esteemed investment bank Lazard Frères, Bernard struck a deal to take the money-losing Boussac Saint-Frères off the hands of the French government. The purchase price?

One franc.

It was a ceremonial amount just to make the sale official. FYI, in the mid-1980s, one US dollar bought around six francs. So, in US dollars, he literally bought the company for 17 cents. Presumably, he was able to raise that capital without taking on any debt 😃 

Bernard proceeded to do what the Socialist French government never could. He fired half the workforce and sold off nearly every company asset. His harsh moves at the company earned Bernard the nickname “The Terminator.”

The only TWO assets Bernard did not sell were:

• A department store chain called Le Bon Marché

• A once-great clothing brand called Christian Dior

Amazingly, by 1987, just two years after closing the deal, Boussac Saint-Frères made $112 million in profit on $1.9 billion in revenue.

To recap. Bernard flipped 17 cents into a thriving business that generated $100+ million per year in profit.

This was just a taste of what was soon to come.

As we alluded to earlier, in the late 1980s, the “corporate raider” struck fear into the hearts of any public company executive team that did not control a majority of its own stock (and therefore could not prevent someone from taking a majority position). In 1987, two publicly traded luxury firms decided to merge, thinking the combined company would fend off any raiders. Those two companies were:

Louis Vuitton

and

Moët Hennessy

The official name of the newly-merged company was Moët Hennessy Louis Vuitton, and as a compromise, the official company acronym was reversed to…

LVMH

Not long after the merger was complete, the head of the Moët Hennessy division convinced the head of the Louis Vuitton division that they were still not safe from a corporate raider takeover. His solution was to convince a deep-pocketed corporate partner to take a 3.5% stake in the company, which would hopefully, finally, shore up all potential remaining threats. The head of the Moët division already had an eager corporate partner: Guinness.

The head of the Louis Vuitton division was open to the plan since it was a nominal stake, but also a little perturbed that the balance of power would slightly shift from two separate equals to being more dominated by beverage makers.

Unfortunately, after Guinness looked under the hood at LVMH, it wanted a whole lot more than 3.5%. Guinness wanted a 20% stake.

To head off this plan and re-balance the business back towards the luxury goods retail division, the head of Louis Vuitton started looking for his own partner to be the company’s white knight. He proposed that LVMH partner with an up-and-coming fellow French luxury goods retailer, the 39-year-old new owner of Christian Dior, Bernard Arnault.

As it turned out, Bernard’s investment bank, Lazard Frères knew about Guinness’ interest in LVMH and thought the two sides should meet. Bernard and the head of Guinness hit it off. They ended up deciding to form their own separate partnership away from the LVMH execs.

In July 1988, Bernard and Guinness announced the formation of a 60/40 joint venture, with Bernard as the 60% majority owner. The partnership would use $1.6 billion in mostly Guinness money to acquire a 24% stake in LVMH.

This is one of those “how did he pull that off?!?!” moments. Somehow, Bernard convinced Guinness to not only go in on the investment together but also to put up most of the money AND let Bernard be the majority owner of the resulting partnership. It was truly a stroke of business genius.

As all this was going on, Bernard raised hundreds of millions of additional capital of his own by selling off minority stakes in the Christian Dior and Le Bon Marché businesses.

In a desperate move, in December 1988, LVMH announced it was breaking itself back up into two separate companies, thinking this move would poison the planned Guinness/Arnault acquisition plan. This turned out to be a pointless endeavor. Just as soon as the breakup was announced, Bernard stunned the LVMH execs with the revelation that he had acquired another $600 million worth of LVMH stock, giving his partnership with Guinness an additional 13.5% stake.

And then, finally, in January 1989, Bernard deployed $500 million to bring his LVMH equity stake up to 43.5%. More importantly, this purchase brought his voting rights up to 35%. That was crucial because, in France, a 30% stake gives the holder “minority blocking” rights to any proposed merger or breakup. So LVMH’s proposed breakup was dead in the water.

On January 13, 1989, Bernard Arnault was unanimously elected chairman of LVMH’s executive leadership board. Within months, both former heads of the LV and MH divisions were gone.

The saga once again ruffled many feathers in the stuffy French business community and earned Bernard a new nickname:

“The Wolf in Cashmere”

There is a healthy dose of irony in that nickname and Bernard’s bad reputation in general. Please recall that the heads of both the Louis Vuitton and Moët Hennessy divisions were so concerned about corporate raiders breaking the company up that they were going to break up the company! Meanwhile, Bernard took control and not only kept everything together, he increased revenue exponentially and expanded the empire.

Today, the firm owns 75 brands, including:

• Fendi

• Givenchy

• Marc Jacobs

• Stella McCartney

• Kenzo

• Celine

• Tag Heuer

• Bulgari

• Veuve Clicquot

• Dom Pérignon

• Hublot

• Rimowa

• Tiffany

• Benefit cosmetics

• Fenty Beauty (a 50/50 partnership with Rihanna and the reason she is a billionaire)

And it’s not just fashion brands, it’s retail outlets as well. As you may recall from a previous Deep Pockets story, in 1996, LVMH bought Chuck Feeney’s Duty Free empire for around $2.5 billion. The following year, LVMH bought Sephora. In 2021, LVMH bought Tiffany’s for $16 billion.

In the 1990s, Bernard had the opportunity to buy Gucci for $400 million. For reasons that remain unclear, he walked away after the terms were drawn up. Less than a year later, Gucci went public and soon had a market cap of $3 billion. In 1999, Gucci was acquired by François Pinault’s holding company, Kering. Today, Kering is LVMH’s primary rival, with brands like Yves Saint Laurent, Balenciaga, Bottega Veneta, and Alexander McQueen.

But even as its closest rival, Kering is still a far cry from LVMH today.

• Kering generates around $21 billion per year in revenue today.

• Rolex does around $10 billion

• Hermes does around $14 billion

• Chanel does around $20 billion

• Richemont (owner of Cartier, Piaget, Jaeger-LeCoultre, Van Cleef & Arples, Montblanc, Baume & Mercier, among others) does around $20 billion

In 2023, LVMH generated $93 billion. And that generated $25 billion in profits.

Twenty years ago, LVMH’s market cap was $35 billion. Ten years ago, its market cap was $85 billion.

As I type this article, LVMH’s market cap is around $350 billion. In May 2023, its market cap was a touch below $500 billion.

Bernard Arnault owns 48% of LVMH stock and 64% of company voting rights.

Separately, Bernard still owns the majority of Christian Dior.

This is why Bernard Arnault is one of the richest people of all time. This is how he earned one of the three largest fortunes in human history. A fortune that shows no sign of slowing down. And to think, he did it all starting with a 17 cent investment and has still never actually founding or creating… anything!

Now that you know, hopefully you’ll recognize and compliment Bernard if you do ever see him wandering the streets 😆 

FINAL WORD

On the next edition of “Deep Pockets,” we’ll explore a modern marvel that comes with lots of controvery - and lots of profits.

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