Via Financial Times

In September 2014, Arnaud Lagardère organised a seminar in Rome for the top managers of his French media group Lagardère. As the team gathered, one crucial person was missing. At the eleventh hour, Mr Lagardère appeared by video link to cancel his appearance, without explaining the reasons why, according to a person who attended.

“If you want to know Arnaud’s whereabouts, check out the social media accounts of his wife,” this person added. The group in Rome did just that. Within minutes, they came across photographs of a perma-tanned Mr Lagardère and his wife, Belgian supermodel Jade Foret, celebrating her 24th birthday. Mr Lagardère had filled their house with balloons, red roses and a Chanel-themed birthday cake.

PARIS, FRANCE - MAY 03: Arnaud Lagardere (C), the head of French media group Lagardere, arrives to attend the group's shareholders meeting, flanked by Chairman and Chief Executive Officer, Hachette Livre, Arnaud Nourry (L), and Chairman, CEO at Lagardere Travel Retail, Dag Inge Rasmussen (R), on May 3, 2018 in Paris, France. The group confirms its withdrawal from the media and sports to focus on book publishing and shops in stations and airports. (Photo by Christophe Morin/IP3/Getty Images)
Arnaud Lagardère, centre, attends a shareholders’ meeting. He once skipped a board meeting to attend the Roland-Garros tennis tournament in Paris © Christophe Morin/Getty

This incident is just one of many that critics say has come to characterise the controversial tenure of the 58-year-old Mr Lagardère at the helm of the French media company. The publicly traded group, which has fallen in value since he took the helm after the sudden death of his father Jean-Luc Lagardère in 2003, was once one of France’s great industrial empires, helping to create European aerospace group Airbus. Now its focus is the Hachette publishing house and Relay newsagents as well as radio, sports and entertainment assets.

Prestigious titles such as Paris Match and weekly newspaper Le Journal du Dimanche give Mr Lagardère a prominent position in the media. Former French president Nicolas Sarkozy once even described him as “my little brother”. But he has also attracted plenty of scorn for both his management style and the performance of the business. Despite running a group that is headquartered in France, Mr Lagardère spends several months of the year in Florida, and once skipped a board meeting to attend the Roland-Garros tennis tournament in Paris.

The company’s share price has substantially underperformed its benchmarks, while management and restructuring costs have soared. Last year Mr Lagardère appeared on the front page of left-leaning daily newspaper Libération with the headline “Papa, j’ai rétréci l’empire” — “Dad, I shrunk the empire.”

FRANCE - JUNE 12: Jacques Chirac Opens Paris On June 12th, 1999 - In Le Bourget,France (Photo by Alain BUU/Gamma-Rapho via Getty Images)
Jean-Luc Lagardère with French president Jacques Chirac in 1999. By then Mr Lagardère had merged Hachette with Matra to create a bizarre missiles-to-magazines business © Gamma-Rapho/Getty

Now Mr Lagardère is facing his moment of truth. Amid a battle with activist investor Amber Capital, a French court has sided with the London hedge fund and ruled that he must publish a decade’s worth of accounts for Lagardère Capital & Management, the private holding company through which he owns his stake in the media group. Lagardère says that Amber is trying to “discredit and destabilise our group”.

The ruling threatens to lift the lid on Mr Lagardère’s personal debt levels and put his empire under renewed scrutiny. In August, the FT published figures from LC&M’s 2017 accounts, showing that it had €204m of debt at the end of 2017 — more than the current value of Mr Lagardère’s shares in the group that bear this name.

The stakes are high. At risk is his ability to maintain a tight grip on Lagardère through an arcane structure, and whether his lenders, investors and supervisory board will continue to support Mr Lagardère once they have a better sense of his true financial situation.

Jean-Luc Lagardère was a customs inspector’s son and an engineer by training. He became chief executive of industrial group Matra in the 1960s, where he developed sophisticated new surface-to-air missiles and diversified it into new areas such as space technology, transport systems and telecommunications.

A foray into media began in 1981 when Mr Lagardère bought Hachette, an ailing 155-year-old French publishing company.

Mr Lagardère merged Matra with Hachette in 1992, resulting in a bizarre missiles-to-magazines business. Around the same time, he also created the Lagardère group, which later absorbed Matra Hatchette and became Lagardère SCA.

Line chart of Share prices rebased showing Diverging fortunes for Airbus and Lagardère

Known as a société en commandite par actions, this is a special legal status that is a hybrid between a partnership and a limited liability company. The elder Mr Lagardère incorporated a personal holding company, LC&M, through which he owned a 5 per cent stake in Lagardère SCA. He guaranteed his investment by taking on personal liability for the company’s debts.

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Meanwhile, through a series of aerospace mergers in the 1990s, Mr Lagardère created the European Aeronautic Defense and Space Company, now Airbus, in which Lagardère group owned a 15 per cent stake.

FRANCE - MAY 08: First appearance of Airbus A380 The assembling hall for the A380 at the Jean Luc Lagardere plant in Toulouse during the presentation of the very first A380 in Toulouse, France on May 08, 2004. (Photo by Raphael GAILLARDE/Gamma-Rapho via Getty Images)
An Airbus A380. Jean-Luc Lagardère created the Airbus company in the late 1990s © Raphael Gaillarde/Gammo-Rapho/Getty

In 2001, the elder Mr Lagardère handed over the day-to-day running of the group to Arnaud, his only son, just two years before he died aged 75. Following his father’s death, the younger Mr Lagardère kept the commandite structure and borrowed money to increase LC&M’s stake in Lagardère SCA.

Lagardère SCA’s structure has several key implications. First, despite only owning a 7.2 per cent stake in the group through LC&M, Mr Lagardère’s position is highly protected. Crucially under the commandite structure, the shareholders — or limited partners — cannot remove the general partner, Mr Lagardère, as they could in a normal company. His mandate is voted for renewal every six years by the supervisory board.

“The commandite structure was made for the 19th century,” says Loïc Dessaint, chief executive officer of corporate governance group Proxinvest. “It’s a fortress, where [ . . .] the standard governance rules don’t apply. It is missing basic shareholder rights, such as the right of the board to dismiss the chief executive.”

Lagardère says the structure provides strong corporate governance and helps to align the interests of management and shareholders, allowing it to focus on “the long-term interest”.

French businessman Arnaud Lagardere and his wife Jade Foret arrive on May 24, 2017 for the screening of the film 'The Beguiled' at the 70th edition of the Cannes Film Festival in Cannes, southern France. / AFP PHOTO / Valery HACHE (Photo credit should read VALERY HACHE/AFP via Getty Images)
Arnaud Lagardère and his wife Jade Foret, a Belgian supermodel, at the Cannes Film Festival © Valery Hache/AFP/Getty

The counterbalance to Mr Lagardère’s unlimited powers as general partner of the SCA is that he also has unlimited responsibility for the company’s liabilities. This quid pro quo is central to Amber’s lawsuit to force Mr Lagardère to publish LC&M’s accounts: Amber argues that if Mr Lagardère bears unlimited responsibility for the company’s liabilities, shareholders need to know what his financial guarantee is worth. Amber declined to comment.

Unlike a typical company, which would employ its executive board directly, LC&M has an agreement with Lagardère to employ the group’s executive board and recharge all the expenses back to the company.

The total costs charged by LC&M to Lagardère, which includes salaries, social charges and expenses, surged almost 80 per cent from €11.7m in 2003 to €21m in 2018. During the same period, the average pay of members of the executive committee — none of whom actually run any of Lagardère’s four divisions — increased 183 per cent.

The most controversial issue has been the dividend policy, and the potential blurring of the lines between Mr Lagardère’s professional responsibilities and personal needs. Mr Lagardère’s large personal debts — and his reliance on the dividend received by LC&M to service these debts — means that he may have different incentives from other shareholders. Analysts at Barclays point out that Lagardère’s dividend has been stable at €1.30 since 2007, despite not being covered by free cash flow most years, and management has been selling non-core assets to finance the dividend.

Analysis of Lagardère’s annual reports show that from 2009 to 2018, Mr Lagardère and LC&M have received around €380m in dividends and pay from the Lagardère group. Despite receiving these payments, there are signs that Mr Lagardère has been facing margin calls from the banks. Some 99.9 per cent of LC&M’s shares in the public group are pledged as collateral to its lenders, according to Lagardère’s 2018 annual report.

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In April, LC&M sold €2m worth of shares in Lagardère, according to French regulatory filings. Lagardère said in May the sale was the result of a “long-term agreement” between a bank and LC&M, which suggests that LC&M was selling under pressure to meet margin calls from its lenders.

Lagardère says the relationship between LC&M and its banks is “normalised and constructive” and the transaction amounted to “minor adjustments”.

Chart showing Lagardère Group's challenging decade

“The way to challenge the commandite is to highlight the fact that Arnaud is not financially able to meet his obligations,” says Frédéric Genevrier, co-founder of OFG Recherche, an investment research firm. “The future of the commandite and whether it is amended, modified or broken up all depends on the quality of LC&M’s balance sheet. The publication of the LC&M accounts could create a dynamic where Arnaud has to prove to banks and investors that he can live up to his financial responsibilities.”

Under the younger Mr Lagardère, the group embarked on a series of acquisitions and disposals that have reshaped his father’s legacy — with very mixed success. He sold Lagardère’s last stake in Airbus in 2013, personally netting a €125.6m dividend that year from the sale. Given the aerospace manufacturer’s surging share price since then, if Lagardère had kept its stake (and received the dividends) it would have made a €12.5bn capital gain.

Mr Lagardère spent the proceeds on sports and media assets: two strategic moves that have been costly for shareholders. Between 2006 and 2018, Lagardère booked €2.9bn of asset impairments and €940m of restructuring charges, according to Amber’s analysis of Lagardère’s annual reports. The sports division, a new area that Mr Lagardère pushed into during 2007 and 2008, has alone recorded almost €800m of impairment and restructuring charges since then.

Now Lagardère is restructuring again. In February 2018 Mr Lagardère announced that he would refocus the group on publishing, its highest cash-generating division, and travel retail, such as shops in train stations and airports.

Lens president Joseph Oughourlian during the Ligue 2 match between Lens and Valenciennes at Stade Bollaert-Delelis on April 12, 2019 in Lens, France. (Photo by Dave Winter/Icon Sport via Getty Images)
Joseph Oughourlian, founder of Amber Capital. The activist investor is trying to force Mr Lagardère to publish the accounts of his private holding company LC&M © Dave Winter/Getty

Three big assets were put on the block: French TV channels, sports and TV production. Now, almost two years later, only the French TV channels have been sold. Mr Lagardère continues to be vague on the asset sales, saying earlier this month that the group is “focused on making the remaining disposals happen at the right time [ . . .] at the right price” and that “we are having discussions with buyers” for sports and TV production.

Lagardère says it has a “strong” balance sheet and that the restructuring figures ignore the fact that shareholders received exceptional dividends of €1.9bn over the same period. It says that while some of its recent investments “have been less fortunate”, the decisions to invest in publishing and travel retail “look very good in hindsight”.

The FT reported in July that Lagardère was in talks to sell its sports division to Wasserman Media Group. These negotiations have subsequently fallen through, according to people familiar with the situation. Lagardère sports was dealt a further blow with the loss of two of its most profitable contracts: in December last year, the loss of its longstanding Asian Football Confederation media rights contract. And earlier this month when African football’s ruling body, the Confederation of African Football, said that it will cancel a $1bn global media and sponsorship rights agreement with the US-based sports agency. Lagardère has said it would fight to enforce the contract.

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Meanwhile, even before Mr Lagardère’s financial position becomes clearer through the publication of the LC&M results, questions are being raised about the role of the group’s auditor, supervisory board and its banks. In a letter to Lagardère’s supervisory board in May, Amber questioned why LC&M’s auditor is Guy Isimat Mirin, at a boutique outfit called Easy-Match Conseil, and not one of the Big Four accountants.

Arnaud Lagardere (L, background), chief executive of the Lagardere group, attends a hearing before the Finance commission of the French National Assembly, 25 October 2007 in Paris, concerning its controversial sale of shares in the aerospace giant EADS in early 2006. EADS has become embroiled in allegations of insider trading after the Lagardere group cut its stake in EADS in 2006 just before Airbus announced major delays in its flagship A380 superjumbo project, which hit the share price. AFP PHOTO FRANCK FIFE (Photo credit should read FRANCK FIFE/AFP via Getty Images)
Arnaud Lagardère (left background) faces the finance commission of the French National Assembly in 2007 © Franck Fife/AFP/Getty

The main lender to LC&M is Crédit Agricole, according to filings with the French regulator, and during Lagardère’s shareholder meeting in May, the group admitted that the same bank was also doing business with Lagardère SCA. At the same meeting, Colette Neuville, president of Adam, an advocacy group for minority shareholders, said this could create a potential conflict of interest. Crédit Agricole declined to comment.

Pressure is also increasing for Mr Lagardère to call time on the LC&M holding company structure. A recent Barclays’ analyst note argued that Lagardère SCA should absorb LC&M, saying “it is unusual to have management employed by a different company”.

Mr Lagardère seems undeterred and continues to fight his adversaries in the courts. Last month Lagardère filed a lawsuit against Amber, seeking €84m in damages for a “destabilisation campaign” since the hedge fund became a shareholder in 2016. Amber said the media group’s lawsuit was “as aggressive as it is baseless” and was intended to “intimidate” Amber and discourage shareholders from criticising the company’s management. It said that over the past few years Mr Lagardère has been selling shares in his group, while Amber has been adding to its position.

So far Mr Lagardère has defied last month’s court order to publish the accounts for LC&M, despite a court ruling that from November 5 he must pay Amber €2,000 per day for every day that he doesn’t publish the LC&M accounts. He is appealing the court’s decision.

While the ruling on the LC&M accounts marks a victory for Amber, other activists have tried unsuccessfully to overhaul Lagardère before. In 2010, US corporate raider Guy Wyser-Pratte failed to win a seat on the company’s board and lost a vote to change its commandite corporate structure.

Although Mr Lagardère cannot be fired by shareholders because he is protected by the commandite structure, the supervisory board could remove him as managing partner if he is shown to be in financial distress. Four members of the supervisory board who have so far supported the status quo have their mandates coming up for renewal by shareholders next year. The largest shareholder is the Qatar Investment Authority.

And time is running out for Mr Lagardère to show the fruits of the transformation plan unveiled almost two years ago, before his own mandate comes up for renewal by the supervisory board in March 2021.

Meanwhile Mr Lagardère is clinging on to the precious commandite, the fortress-like structure that allows him to run the group unchallenged while receiving dividends to service the debts at his LC&M personal holding company.

Speaking on Lagardère’s third-quarter results call with analysts earlier this month, Mr Lagardère said he would aim to reduce costs. But when he was asked about altering the structure of his personal holding company, he said: “Obviously not, never ever, not over my dead body.”