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Puma plunges as Gucci owner Kering moves to shed its stake

[PARIS] Puma plummeted the most in 16 years after Kering announced plans to give up control of the German sportswear outfitter, focusing solely on luxury and catwalk brands like Gucci and Saint Laurent.

Under the terms of the agreement, Kering will distribute to its investors 70 percent of the shares of Puma. The plan leaves Kering founder Francois Pinault's holding company Artemis with about 29 per cent of Puma. Shares of Puma fell as much as 16 per cent in early trading in Frankfurt, while Kering fell as much as two per cent in Paris after earlier rising as much as 1.6 per cent.

Kering's decision disappointed some Puma investors who had hoped that the French company would find a buyer willing to pay a premium for the shares.

Sophie Park, an analyst at Bank of America Merrill Lynch, cut Puma shares to underperform from "buy", saying the stock doesn't deserve a valuation premium to Adidas given that the companies are growing at about the same rate. The company also may be pressured by price-cutting in the European market, she wrote.

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Kering follows rivals in cleaning up its portfolio after LVMH sold Donna Karan and Hermes divested Leica. The decision to spin it off is evidence of a lack of acquisition opportunities in luxury goods in the near term, according to analysts at Raymond James. Luca Solca, an analyst at Exane BNP Paribas, wrote that Kering has come of age as a pure luxury company.

"We're very pleased Kering has proposed this way to reduce its stake in Puma, as it allows us to continue with our current business strategy," Puma chief executive officer Bjoern Gulden said on a conference call with reporters, adding there will be no changes to the company's strategy due to the change of ownership. "Kering and Artemis will remain strong partners and shareholders, which proves they believe in our strategy."

Kering bought Puma in 2007 as part of a push into sport and lifestyle brands that also saw the group acquire skateboarding brand Volcom. Puma was seen at the time as a pioneer for its fusion of fashion and performance clothing and its collaborations with designers from Philippe Starck to Alexander McQueen.

Integration Struggles

Puma's shares have underperformed Germany's CDAX Index since Kering bought the stake in 2007 for 330 euros a share. The stock has returned 5.7 per cent including dividends, compared with 89 per cent for the benchmark. In the same period, Nike returned 454 per cent and Adidas returned 360 per cent.

"The contemplated distribution of Puma shares to our shareholders would be a significant milestone in the history of the group," Kering chairman Francois-Henri Pinault, the son of Francois Pinault, said in the statement. "Kering would dedicate itself entirely to the development of its luxury houses." Puma accounted for about 30 per cent of Kering's sales in 2016.

Under Kering's ownership, initiatives like the higher-priced Fenty Puma by Rihanna collection have helped the apparel maker boost brand image and profitability after a period when low desirability and an overextended store network had made for an unpopular match with investors. But Kering struggled to integrate it firmly into its stable of other brands, and the company has promised shareholders it would work toward becoming a pure player in luxury.  Terms of the share distribution are under review and will be submitted to Kering shareholders for a vote on April 26, the company said. Exane analyst Solca said he estimates the ratio should be about one Puma share for each 12 of Kering.

New Puma shareholders might not be interested in holding the stock, even though the company is a "strong recovery story", wrote Cedric Lecasble, an analyst at Raymond James. He said he would have preferred Kering selling Puma to another company.

The Pinaults have gradually pushed Kering's portfolio upmarket since the company took a controlling stake in Gucci in 2001. The family, which also owns the auction house Christie's, sold its 24.3 per cent stake in the French books-and-electronics group Fnac Darty last July.

Kering will sell its remaining lifestyle holding, Volcom, "when the time is right," and a solution is found that is good for both Kering and the brand, chief financial officer Jean-Marc Duplaix said in a call with reporters.

"This was a simple, rapid way of creating value for our investors or giving them the option to sell," he said of the transaction.

Puma is based in the German provincial town of Herzogenaurach, the same city as Adidas. The two companies were founded by brothers, and both had an early core foothold in soccer. Adidas is by far the bigger of the two by sales and market value, while Puma has sought to burnish its credentials in street fashion and collaborations with music superstars like Rihanna.

Kering will retain about 16 per cent of Puma's outstanding shares and said it will remain a long-term shareholder, despite speculation it could exit entirely.

"The eventual sale of the remaining stake in Puma will give Kering additional resources to finance possible acquisitions or to accelerate their debt repayment," wrote Mario Ortelli, an analyst at Sanford C. Bernstein.

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