While GrandVision's management brings in other arguments for supporting the bid announced by PAI one week ago, the move can be seen as an effort by some of its founding shareholders to fend off a possible hostile takeover by HAL Trust, the Dutch investment company that owns 68 percent of Pearle Europe. The process may accelerate a counterbid by HAL or another investor, such as Fielmann, creating a difficult and tense situation that may lead some of the founding shareholders to quit the management. In such a case, they would cash out at a higher price than the one that the stock market has assigned to the French-based optical retail group lately, in spite of the efforts made by the management to maximize its profitability.

The founding shareholders, who don't have enough shares now to oppose a hostile bid, seem to inclined to consider a sale of GrandVision along with PAI only 3-5 years from now, when it will probably be worth more. Officially, GrandVision's board of directors says it has been approached by PAI. After asking for an opinion from Rothschild & Cie. on its proposed tender offer, it approved at a meeting on July 22 the idea of taking the company private because its regained financial position and the capital required for future development, which now targets profitability rather than revenue growth, make it no longer necessary for GrandVision to remain on the stock exchange.

The board finds the price of €21 a share offered by PAI to be fair, even though it carries a premium of only 15 percent over the latest stock market quotation, which has been stagnating in spite of strong trading activity and improved profits over the past 24 months. The premium is of 27.3 percent against the stock's average quotation of the last 6 months. The founding shareholders and some potential investors had previously found the company to be grossly undervalued, particularly after hearing what Luxottica paid for Sunglass Hut International after several rounds of negotiations. The price offered by PAI values GrandVision at €491 million or 0.86 times expected 2003 sales and 9 times gross operating income (Ebitda), which is admittedly in the low end of the range observed in recent takeover operations in the sector.

PAI, a fund belonging to the large Franco-Dutch Paribas investment group, stands for Paribas Affaires Industrielles. Its cash tender offer for 100 percent of GrandVision's shares, which is being presented by Credit Lyonnais, HSBC CCF and Natexis Bleichroeder, is structured in an interesting manner, involving two separate funds set up for this transaction and managed by PAI ? Financière 1 PAI and Financière 2 PAI ? to which shareholders would be invited to tender their own shares. The founding shareholders would tender their shares to one or the other fund. Some of them, particularly those who want to continue to be actively involved in GrandVision, would tender to Financière 1 and subsequently subscribe to an equity increase that would give them a certain control over it.

While this is not clearly specified in so many words in the offer, Financière 1 would then control GrandVision indirectly through Financière 2. Through this mechanism, PAI's statement indicates, the founding shareholders who don't want to cash out would obtain 23 percent of GrandVision's equity and 37 percent of the voting rights. Right now, all the founding shareholders have only 14.72 percent of the group's equity and less than the 33.3 percent in voting rights that would allow them to prevent a hostile bid.

As we have previously reported, cash-rich Fielmann is interested in GrandVision, in spite of a big difference in company cultures, but while it's looking at penetrating new markets in Europe, the UK and Spain seem to be the biggest priorities for the German company, and GrandVision's investments in Italy doesn't get Günther Fielmann's favor. Pearle Vision, the profitable Dutch-based company controlled by HAL Investments, has made many other smaller acquisitions lately (see subsequent story on the takeover of Synoptik) in an attempt to cover the whole European market. HAL Investments owns 68 percent of Pearle Europe, while Cole National of the USA and the management hold the balance of 21 and 11 percent, respectively.

HAL has been buying small lots of shares in GrandVision at low prices through the stock market in the past year or so. A few weeks ago it raised its stake in the French firm to 6.66 percent. More recently, just before PAI's bid, HAL apparently increased it further to more than 8 percent, possibly triggering what some analysts regard as a defensive scheme.

It will probably take another week or so for the watchdog authorities of the French Bourse to endorse PAI's proposal. If approved, its tender may take another 6 weeks and expire in mid-September, giving some time to HAL, Fielmann or other investors to make a higher bid if they want to. Neither of them is making a comment at this stage, while Luxottica confirms that it has no interest in GrandVision and Dino Tabacchi, the new owner of Italy's Salmoiraghi & Viganò, shows a similar attitude. PAI has already indicated that its own offer is conditional on acquiring at least two-thirds of the equity and voting rights, with a compulsory squeeze-out clause if at least 95 percent of the voting rights are tendered.

In reporting lower than expected sales for the1st half on July 8, GrandVision's CEO, Daniel Abittan, made financial analysts wonder whether he will attain his goal of a 9.5 percent operating margin (Ebit) in 2003. Abittan, who owns about 8 percent of the company's equity and 12-13 percent of the voting rights, publicly declared that this would depend on a good 2nd half. Some cuts in central overheads and staff costs should help.

In the first 6 months of this year, the group's total sales declined by 1 percent to €305 million, although they would have risen by 2 percent if the euro had not risen by 9 percent against the British pound. On the other hand, on a same-store basis, sales increased by 1 percent in the 2nd quarter, offsetting a 1 percent decline in the 1st one. Excluding 90 franchises, the number of stores operated by GrandVision rose by 8 to 386, including 198 in France, 105 in the UK, 31 in Italy, 9 in Spain and Portugal, 9 in Belgium and Luxembourg, 5 in the Czech Republic and 4 in Switzerland, plus 26 Solaris sunglass shops at various locations across Europe.

The group's UK chain, Vision Express, contributed 14 percent lower revenues of €99 million in the period, but in local currencies and on a same-store basis the 6.5 percent drop of the 1st quarter softened to a 6.5 percent drop in the 2nd one. In France, sales were up 3 percent at GrandOptical and up 11 percent at Générale d'Optique. In Italy, GrandOptical did 14 percent better largely because of new store openings. The best same-store increases occurred in Switzerland and Belgium/Luxembourg with 10 and 5 percent, respectively.