Backstabbing, Patronage And Squabbles in French Billionaire Class

(Bloomberg Opinion) -- Arnaud Lagardere is learning the hard way that marriages of convenience in the business world can work for you, and against you. 

The hedge fund Amber Capital U.K. LLP has for two years been targeting the eponymous Lagardere SCA — a media and retail company founded by Arnaud’s late father, which is now run by the son — for sweeping governance changes. To fend off the activist attack, Lagardere turned to the French establishment for support earlier this year.

Three French billionaires rallied to the cause. First off, Vincent Bollore’s Vivendi SA and the investor Marc Ladreit de Lacharriere both acquired Lagardere stakes. Their votes helped the company defeat Amber’s effort to replace much of the board in a shareholder vote in May. Bernard Arnault — the boss of LVMH SE, and France’s richest man — later that month bought a 100 million-euro ($118 million) stake in the holding company through which Arnaud owns his Lagardere shares.

The alliance didn’t last long. Bollore, ever the opportunist, has now switched sides and aligned instead with Amber. Vivendi cited the poor financial performance of Lagardere, which reported a net loss of 481 million euros in the six months through June. It can’t have helped that Arnaud publicly declared his interest in acquiring the publisher Simon & Schuster, a potential acquisition target for Vivendi. While Bollore’s and Amber’s agendas don’t exactly match up, their mutual enemy has made them friends.

The new coalition makes life deeply uncomfortable for Arnaud. Vivendi and Amber are Lagardere’s two biggest investors, with a combined 44% stake.

Amber’s biggest complaint is an antiquated management structure that lets Arnaud retain de facto control of a company in which he owns just 7% of the stock. This partnership arrangement, known in France as a “commandite,” also means Arnaud’s management firm is generously reimbursed, even though operational responsibility is largely delegated to Lagardere’s two businesses, publishing and retail.

If Bollore and his hedge fund ally expected their combined might to weaken Arnaud’s resolve, they’ve been quickly disabused of the idea. On Aug. 17, less than a week after Vivendi announced it was teaming up with Amber, Lagardere’s board extended Arnaud’s contract by four years. That looked like an effort to shore up control before the reinforced opposition was able to drive through a board shakeup. It was also a pretty good demonstration of why Amber is so unhappy about the company’s corporate governance — the commandite structure means even the board can’t oust Arnaud until the end of his contract.

Arnaud’s rearguard defense may yet be in vain, however. According to Reuters, Vivendi and Amber are seeking a shareholder meeting to change the board anyway. If no such meeting is approved by the current directors, as seems likely, a court case is bound to follow. Would a judge really dismiss the demands of such a large tranche of the shareholder base?

With board seats, Arnaud’s opponents could turn off the money spigot to his management company. That might be enough to force him to negotiate an end to the commandite structure in return for more equity. He’d then be paid with dividends rather than management fees.

By roping in Bollore, Arnault and Ladreit de Lacharriere, Lagardere was tacitly admitting that he couldn’t count on support against Amber from his existing investors. Those minority shareholders would be justified in wanting change: $10 invested in Lagardere when Arnaud took sole control in 2003 would be worth $17 today. The same amount invested in Europe’s Stoxx 600 Media Index or France’s benchmark CAC 40 Index would be worth $26 and $23 respectively.

So can Arnaud count on Arnault or Ladreit de Lacharriere to see off Bollore and the hedge find? It’s doubtful. Vivendi has invested more than either man, and its ownership of France’s Canal+ pay-TV service and Editis publishing house means it probably spies corporate opportunity in this messy situation. Lagardere’s Hachette publishing business and Europe 1 radio network might be attractive targets for Bollore.

Lagardere must have thought that bringing in these pillars of the establishment would shore up his position at the 2 billion-euro company. Instead, he appears to have invited the fox into the henhouse.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

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