Pinault’s Big Sale

At Christie’s contemporary art sale in New York last month, the top lot was a huge mural painting by Mark Rothko that the auction house hailed as a “masterwork” and “of particular importance.” When the bidding was over, No. 9 (White and Black on Wine) had sold for $16.4 million — a record for a Rothko at auction, as Christie’s was quick to point out.

What Christie’s didn’t trumpet was the identity of the seller: François Pinault, the self-made French billionaire whose holdings happen to include Christie’s itself. The Rothko was in good company. Lot 39 at the same May 14 auction was a “beautiful and mesmerizing” Yves Klein work owned by Pinault that went for $5.3 million. A week earlier, a Degas statue of a 14-year-old dancer from his collection fetched $10.3 million. A week later, Christie’s in London raised €1.3 million from an unprecedented clearance sale of vintage wine from his legendary Bordeaux vineyard, Château Latour, including bottles dating back to 1863.

And those are just the auctions. On the same day the wine went under the hammer, Artémis — the Pinault family’s holding company — issued j520 million in bonds that it said was to be used to refinance existing bank debt. That was separate from the j1 billion-plus convertible bond issue announced only days earlier by the firm at the core of the Pinault empire — a publicly traded retail conglomerate called Pinault Printemps-Redoute (PPR), in which Pinault holds a 42% stake. PPR has also sold more than j3 billion in assets this year.

People close to Pinault insist that the timing of these transactions is purely coincidental, and that he’s not experiencing any financial difficulty. Nonetheless, his cash-raising flurry is the buzz of Paris, where the 66-year-old is a larger-than-life figure who is feared, admired and criticized in equal measure. He is one of the 10 richest people in France, whose wealth at its peak in 2000 was estimated by Forbes at $7.8 billion. (Forbes today thinks he’s worth $5 billion less than that). A wily Breton who built his business empire from humble beginnings in the timber industry, Pinault has had numerous scrapes over the years with competitors, shareholders, French tax authorities and regulators in California, who are currently pursuing a $1 billion lawsuit against him. And there are several signs that suggest Pinault may have come close to overleveraging himself.

Pinault himself isn’t talking, and provides only the skimpiest of details about his private finances. A spokeswoman says he frequently buys and sells art. Artémis downplays its bond issue as a routine exercise, and says its debt of about €4.6 billion has remained fairly stable. As for PPR, it says its asset sales are part of a long-term strategy to concentrate on high-end retailing and luxury goods and jettison most other businesses. “We’re just implementing the strategy a bit faster and in better conditions than people expected,” says a spokesman.

But Pinault’s Achilles heel is not so much the level of his debt as the value of the assets he has pledged to the banks against it. The stock of PPR, by far his most important holding, has dropped from a high of €268 to a low earlier this year around €44. The more the stock declines, the more Pinault has to pledge to the banks. According to PPR’s 2002 accounts, 36.8 million of the 51.6 million PPR shares owned by Artémis were pledged to banks at the end of last year. A significant cause of these woes dates back to September 2001, when Pinault won a ferocious two-year fight with another French tycoon, Bernard Arnault, for control of the Italian fashion firm Gucci. Victory seemed sweet, but it carried a $7 billion price tag.

The timing could not have been worse. The day after the deal was signed, al-Qaeda slammed planes into Manhattan’s World Trade Center, crushing the already fragile economy. With hindsight, it’s clear that Pinault overpaid for Gucci. The Sept. 10 accord allowed PPR to buy up to 70% of Gucci on the stock market, and obliged it to bid for the rest in 2004 at a price of $101.50 per share. Financial analysts estimate the stock would be trading at around $55 today based on the firm’s performance if PPR were not buying it up.

The bigger issue for investors is whether Pinault’s financial situation could drain PPR. Colette Neuville, a French shareholder activist who has frequently crossed swords with Pinault in the past, wanted to know at a recent shareholders’ meeting why the company was buying back its stock so aggressively and paying out such big dividends. Serge Weinberg, PPR’s chief executive, replied that the stock buybacks were standard, and that the size of the dividend was in line with other French companies. Neuville isn’t satisfied. Pinault’s problem, she says, “is that he’s too astute. He always goes through the yellow light.”

Ironically, Gucci is now also the temporary solution. To stave off Arnault’s unwanted advances during the takeover battle, Gucci raised capital that it has never used — and thus is sitting atop a pile of cash. Late last month, the company announced that it is distributing j1.34 billion to shareholders, handing an €850 million windfall to PPR. That gave a big bounce to PPR’s stock price, helping Pinault in the process. “We don’t need all this capital,” says Domenico De Sole, Gucci’s chief executive, who insists that he wasn’t pressured into the decision. Pinault still has some big legal woes in California to worry about. First, there’s a high-profile suit brought by the California Department of Insurance against him and French bank Crédit Lyonnais, alleging that Pinault in the early 1990s made just over $1 billion from an alleged fraud by Crédit Lyonnais involving a failing insurer, Executive Life, and then conspired to hide the true details. Pinault vigorously denies the charges. Second, there’s a federal grand jury that’s considering whether to indict him for the same fraud. “He has got very significant legal problems here in America,” says Gary Fontana, the lead attorney representing the Department of Insurance. Because Crédit Lyonnais at the time was state-owned, the French government has agreed to indemnify it — but not necessarily Pinault. So if he loses, Pinault faces a tough choice: persuade the French government to pick up his bill, or sell some more of those masterworks at Christie’s.