The Billionaire Who Wasn't (34 page)

“I tried to extract from Arnault, ‘What is your strategy? What do you want to do?' But he was not very forthcoming,” recalled Pilaro. “I specifically said, ‘If your strategy is to improve the profitability of both companies, let me give you a little secret. There is a very simple way of doing this. You should sell your [Louis Vuitton] merchandise to us to resell.'”

The Brooklyn-born lawyer's next step was to propose to Miller and Parker that if Feeney was keen to sell, then they three, and not Arnault, should buy him out. They drew up a formal proposition to acquire Feeney's 38.75 percent holding in DFS, plus his interests in the Camus distribution business and the retail stores Feeney had acquired in Hawaii—collectively known as the Hawaiian Retail Group—based on a total capital valuation for the whole duty-free business of $2.3 billion, which was more than a billion less than Arnault's valuation.

The Wise Man now got caught up in the affair. Since the dispute over Feeney's retail activities in Hawaii, the owners had a mechanism for coping with their differences, and at this point they contacted Ira Millstein at his Manhattan office and asked him to relay their offer to Feeney. Millstein did so on February 23. Feeney didn't bother to respond. He found the offer “somewhat confusing and clearly inequitable,” given that LVMH had just made a much higher offer without asking for the Hawaiian stores to be thrown in. Shortly afterward, Ira Millstein told Feeney, “Tony's miffed that you didn't respond.” Feeney replied, “I don't respond to an offer like that.”

Millstein then accompanied Miller, Parker, and Pilaro to a meeting with LVMH in Paris on May 6 to see if Arnault would up the ante. Arnault said he would raise his price on the basis of a capital value of DFS of $4 billion if he was able to acquire a majority shareholding. Millstein invited Arnault to come to New York a month later for a one-to-one meeting at which he would convey the response of the shareholders. Miller warned the Wise Man before the meeting that he would not consider a sale at the price Arnault was offering. Arnault flew from Paris to New York, and on June 13 presented Millstein with a formal proposal—to buy a majority holding in DFS based on a capital value of at least $4 billion, or a minority holding based on a valuation of $3.5 billion. The French luxury goods mogul told the Wise Man that he believed there was a unique synergy between the two companies, and that was why he could pay more than anyone else.

After the Arnault-Millstein meeting in New York, Feeney took Parker to dinner to urge him to think about joining him in selling their combined shareholding to LVMH. He sensed that Parker was wavering. The two had always maintained cordial relations, even during the split over Feeney's independent retail activities. Parker was never
emotional
about that, Tony Pilaro recalled. Together Feeney and Parker owned 58.75 percent of the equity; if they sold together, it would give Arnault control of the duty-free empire and guarantee a valuation of at least $4 billion.

Parker felt that he was the “piggy in the middle.” His arm was being bent by Feeney on one side and Tony on the other. But the Arnault offer was looking very attractive. The LVMH head was valuing DFS at 33 percent more than its estimated annual sales of $3 billion, which was a hefty premium even in the bull market for high-end retailers in the mid-1990s. Feeney stood to get something approaching $1.6 billion and Parker over $800 million. The payments would be in cash. “I started thinking about it,” said Parker. “It was a staggering amount of money.”

The tipping point for Parker was a commitment that Feeney extracted from Arnault that if Feeney and Parker sold, the other two DFS owners could take up the offer on the same terms up to sixty days after the closing. “We made an undertaking that nobody would be hung out to dry,” said Feeney.

Parker decided to throw in his lot with Feeney. “Alan is pragmatic, he's a good bean counter and a good financial investor,” said Feeney. “He agreed to sell.”

Miller had to be told. They set up a conference call. “Bob was terribly distressed,” said Feeney. “He was shocked that Alan would come to our side. He accused Alan of selling out. There was an abrupt end to the conversation.”

At this stage Tony Pilaro pushed the idea of floating the company on the stock market, and he got investment bankers Morgan Stanley to draw up a proposal for going public. “Tony was always a market guy, his idea was always to go public,” recalled Parker. A meeting of the owners, without Feeney, was set up in Ira Millstein's office at 767 Fifth Avenue to hear what Morgan Stanley had to say. The investment bankers, with backing from Chase Manhattan Bank, told them that they could get between $5 and $7 billion in an initial public offering (IPO), but the market wasn't ripe enough and they would have to wait six months. The choice facing them, recalled Parker, was between a potential $6 billion from the IPO “and the bullshit from Morgan Stanley that it would be a lot more than that,” and a share of
a guaranteed $4 billion from Arnault. Six billion sounded very good, but it was normal that only 20 percent would be offered initially as investors would want to see them stay in charge.

“Chuck Feeney wasn't convinced that an IPO could be done or that it would be the appropriate thing to do,” said Chris Oechsli, “but Tony kept badgering Bob, and Bob was kind of taking his cues from Tony.” “Bob was totally in Tony's pocket,” declared Parker.

At another meeting of the shareholders and their lawyers with the Wise Man in New York, Pilaro made allegations about Chuck giving confidential information to a competitor. Harvey Dale countered sharply that in having Morgan Stanley evaluate DFS for an IPO, Pilaro had provided at least as much information to bankers.

The action moved back to Paris. On June 26, Ira Millstein and the four DFS shareholders rented a conference room at the Ritz on Place Vendôme, a short walk from Avenue Montaigne, to examine all the variations on the table and then go to see Arnault. (“I still can't get over the cost of the room for the meeting,” said Parker years later.) Just as they settled down, however, Miller and Pilaro came up with a surprise of their own. They presented Feeney and Parker with an offer to buy them out, based on a valuation of DFS at $4 billion, including the Camus business and Feeney's retail operation in Hawaii. They argued that the least they could do was allow them to buy DFS at the same price Arnault was offering—though the LVMH chief had not asked for the Hawaiian Retail Group to be included. Feeney and Parker asked for time to think about it. They broke up in less than a hour, and the meeting with Arnault was put off.

The atmosphere between the two camps grew distinctly hostile. Miller and Pilaro arranged for their bankers to visit DFS stores to do due diligence before putting up the finance for a possible buyout. “Bob and Tony were going to have DFS pay for the bankers' trip by charter aircraft, which I found out about and said, ‘No way! This is a shareholder transaction, this isn't company expense,'” said Parker. “Things got pretty hairy after that. There was not a lot of friendliness. It was an awful thing having been in business with them for thirty years. I mean, the animosity between Chuck and Bob was pretty bad. I had been pretty friendly with everybody, and now I was surely on Chuck's side.”

Parker was never convinced that Miller and Pilaro had the financing lined up to buy them out. Feeney was even more skeptical. “Miller tried to
prevent us from selling to Arnault because he wanted to buy it himself,” he said, “but he couldn't. He didn't have the money. It was an equity investment, a high, substantial-risk investment, and he had to put up big money.” Tony Pilaro insisted that they did have the banks' support. “We had it,” he said. “I had the letter. It said, ‘Tony Pilaro, Bob Miller, you have got a $3.75 billion credit line, all you have got to do is pay us an up-front fee of $20 million for the commitment.' The next day we get another letter. It said, ‘And by the way Tony, if you need another $500 million for working capital [you can get it].' Maybe Chuck didn't feel that that was real. But we did have the money.”

CHAPTER 23

Musical Chairs

On July 3, 1996, a week after Bob Miller and Tony Pilaro presented Chuck Feeney and Alan Parker with an offer to buy them out of DFS, the four came together in Cannes on the French Riviera for the wedding of Jean Gentzbourger's son Marco. All the families were invited. Chuck's former wife, Danielle, and their children were among the wedding guests. Miller was accompanied by his wife, Chantal, and his daughters and his bodyguard. It was a rare social get-together of the DFS owners, and it came at the height of the biggest crisis in their thirty-year relationship. Typically, Chuck lodged in a small downtown hotel, the three-star L'Olivier on Rue des Tambourinaires, while the others checked into Les Muscadin, a four-star town-house hotel with sweeping views of the Bay of Cannes once favored by Picasso.

Feeney and Parker had already decided to reject the offer made by their partners unless Miller and Pilaro raised their price and produced the money by September 1, after which they would proceed with a sale of their shareholdings to LVMH. They expressed their concern that the Hawaii bid was coming up again in the autumn, and if DFS lost it, the value of the company would fall, and they wanted to move before that.

However, the wedding gave Feeney and Parker an opportunity to pull Miller aside on his own and persuade him to go along with the sale to LVMH, or at least not try to block it. They met him discreetly in a large waterfront hotel on the Croisette. They went over everything again, pointing
out that they had protected Miller in the agreement with Arnault as it included a sixty-day window for him to sell on the same terms. Parker thought they had Bob convinced.

But not for long. The next morning, recalled Parker, “I got a call from Tony—would I go to the wedding in the car with Linda, his wife at the time. I thought it odd but I said, no problem. I guess Tony had got some whiff of what was going on, and he needed to occupy me. He then shot off to see Bob. The next car was Bob and Tony. By the time Bob got to the wedding, he said, ‘I'm not going to do the deal, it's not going to work.'”

Pilaro dismissed the suggestion that he connived to get in the car with Bob. “I'm not that devious, believe me, I certainly wasn't playing musical chairs,” he said. He protested that he could influence Miller on
how
to do something but not
whether
to do it. “To think otherwise is an overstatement of the power of Pilaro's logic!”

Miller would later conclude that “Tony was probably more of a hindrance to me than anything else, because he was pushing for me to buy out Chuck. Tony had a certain way of hyping things up.”

The colloquy continued at a reception under the lemon trees in the garden of Gentzbourger's elegant villa on the Avenue de la Croix des Gardes overlooking Cannes. “I knew something was going on,” recalled Gentzbourger. “They were talking, and they didn't look very happy. Tony was jumping all around from one to the other trying to activate something.” He joked with Feeney later that he should get a commission for providing his garden for such high-level negotiations.

The young Feeneys posed for pictures with the Millers, but the tension between their parents spoiled the atmosphere. They felt the Miller sisters saw them as the bad guys whose dad was being horrible to their dad, without any appreciation that perhaps Bob Miller was making a big mistake. Danielle had remained for years on cordial terms with the Millers, and she had liked Bob when they all lived in Hong Kong. But the friendship had been fraying over the years and she now saw Bob's opposition to her former husband as akin to treason.

Miller, too, was deeply unhappy about the turn of events. “It was really tough for me—my whole life has been spent building this business, and now everybody was moving too quickly and what with the high cost of mezzanine debt, the possibility of an IPO, or selling to Arnault, it was very difficult to think clearly. Tony was pushing a plan that maybe we could buy out
Chuck. We actually had the bankers lined up to raise $2 billion in cash for us, but I was unhappy with the high interest costs. It was a very difficult and tormenting time for me.”

Chuck Feeney showed few signs of strain. Oechsli recalled going into his office in London at the height of the fraught negotiations and seeing plans for a restaurant in San Francisco's Bayside Village called Pizza Prego at the top of the pile of papers on his desk. “He would be more interested in the pizza menus than he would be in discussions about a $4-billion sale!”

But even Feeney began to have second thoughts, recalled Oechsli. “He felt almost an obligation to Arnault that he wasn't going to hand him a business with feuding partners, and at one point, after Alan Parker came on board, he was just prepared to not do it. It was consistent with his avoidance of conflict. I remember going down to my office, and just typing out a memo saying, ‘This is it. You might never have this opportunity again. These are big boys and they all know what they are getting into.' I was worn out at this stage,” said Oechsli. “We had been at this for two years. We had to do it.”

As the summer dragged on, nothing got resolved. The Wise Man expressed his frustration with the impasse in a letter delivered to each of the DFS owners: “Two people want to diversify, two do not. This has happened before in the history of the world, and people have worked it out. It doesn't require a rocket scientist, only a recognition of reality.” A protracted legal wrangle could expose DFS's “dirty linen,” he warned, and if he were forced to arbitrate, the inner workings of one of the most secretive companies in the world would be revealed. “So far the world isn't aware of your respective holdings, interests, etc. Nasty litigation will bring it all out.”

His words had no effect. The final split came on August 30, 1996. On that day Arnault had been invited to make a presentation to the four owners at Ira Millstein's office in New York. He had already sent word through a back channel that he would pay Miller and Pilaro a premium—a little extra to save face—if they agreed to sell. Getting more than Chuck would surely satisfy Bob's pride.