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LVMH's $100 Million Morgan Stanley Suit Leaves Analysts Bemused

Nov 27, 2002 | Wall Street Journal

A $100 million lawsuit launched by LVMH Moet Hennessy Louis Vuitton SA (F.LVH) over "unfair treatment" Tuesday left brokerage Morgan Stanley's star analyst Claire Kent tight-lipped.

But the stark reminder of just how much ill-feeling festers between LVMH and its rival Gucci Group NV set tongues wagging throughout the rest of a bemused luxury goods analyst community.

"I'm in shock," said one London-based analyst, speaking, like many Tuesday, only on condition of anonymity. "It's just unbelievable ... I wouldn't take the case too seriously."

The case, to be heard at an as-yet unscheduled date, comes hard on the heels of a crackdown on Wall Street designed to ensure foolproof separation, known as "Chinese walls," between investment banking activity and brokerage business at major banks.

Best known for its Louis Vuitton leather goods, the world's biggest sector player said it had filed suit in a commercial court in Paris more than two weeks ago against Morgan Stanley, famed in the industry for successfully advising Gucci in 1999 on how to foil a takeover approach by LVMH.

LVMH, headed by billionaire magnate Bernard Arnault, said Tuesday it believes the brokerage's analyst team, led by Kent, is biased in favor of Gucci and against LVMH in its coverage.

"They don't believe the 'Chinese walls' work at Morgan Stanley," said one person familiar with thinking at LVMH.

Kent, rated luxury-goods-analyst-of-the-year eight times in row by trade publication "Institutional Investor," referred questions to company spokesmen. They in turn quoted a three-line disclaimer in her most recent published research, dated Nov. 22, saying the bank "categorically rejects LVMH's claim" and will mount a "vigorous" defense against the action.

It was Morgan Stanley's investment bankers who advised Gucci to invite LVMH's French rival Pinault-Printemps-Redoute SA to pay $3 billion for over 40% of the Italy fashion house, foiling LMVH's own bid in the making.

Lingering Hostility

While PPR, LVMH and Gucci eventually reached a multi-billion dollar settlement late in 2001, industry insiders and analysts believe there's little doubt lingering hostility toward Morgan Stanley on LVMH's part is central to the case, rather than Claire Kent's most recently published research on the company.

Downgrading the sector overall on Nov. 7, Kent retained LVMH at underweight and described it as one of Morgan Stanley's "least favorite stocks."

Despite being impressed by the "relative resilience of Louis Vuitton sales" during the ongoing industry downturn, Kent said she doubts LVMH will show " significantly faster growth in earnings before interest and tax than other quoted luxury companies in 2003, as it did in 2002."

In the same note, Kent retained Gucci at overweight and described the company's management as "the only one capable of creating a second strong brand, Yves Saint Laurent."

Analysts said that comment may have irked LVMH's management, which has been trumpeting through the summer that its Christian Dior fashion house will be profitable this year.

Gucci doesn't expect YSL to be profitable until 2004, and in a recent broadside Gucci Chief Executive Domenico de Sole said, "To us, 15 years isn't acceptable as the time it would take to turn a brand around."

Of 25 analysts' ratings on LVMH compiled by JCF Finance Group, 11 were overweight, with six at hold, four at underweight, two at buy and two at sell.

Of 21 Gucci ratings, 14 were overweight, five were hold, one was underweight and one was buy.

While not automatically rallying to Morgan Stanley's cause, most analysts said they already had to face varying degrees of pressure from companies or their bankers in carrying out their work.

"All the papers talk about analysts not being independent, but no one blames the companies," said one analyst with a large European bank. "There lies the real conflict of interest: clients go for analysts that give them access to company management, but this is only offered if you have a buy on the stock."

"Why does LVMH, or any other company for that matter, care about what an analyst says if they can demonstrate with facts that they are much better?" she asked.

Downgrading the luxury goods sector overall on Nov. 7, Morgan Stanley analyst Claire Kent retained LVMH at equal weight.

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