War of the Handbags: The Takeover Battle for Gucci Group N.V.

At three o?clock in the morning on September 10, 2001, Thierry Hautillac, a risk arbitrageur, learns of the final agreement between Pinault-Printemps-Redoute SA (?PPR?) and LVMH Moët Hennessy Louis Vuitton SA (?LVMH?). After a contest for control of Gucci lasting over two years, PPR has emerged as the winner. PPR and LVMH have agreed for PPR to buy about half of LVMH?s stock in Gucci for $94 per share, for Gucci to pay an extraordinary dividend of $7 per share, and for PPR to give a two and a half year put option with a strike price of $101.50 to the public shareholders in Gucci.

The primary task for the student in this case is to recommend a course of action for Hautillac: should he sell his 2% holding of Gucci shares when the market opens, continue to hold his shares, or buy more shares? The student must estimate the risky arbitrage returns from each of these choices. As a basis for this decision, the student must value the terms of payment and consider what the Gucci stock price will do upon the mark