June 1 (Bloomberg) -- Permira Advisers LLP, manager of Europe's largest buyout fund, will bid for Valentino Fashion Group SpA to gain the Hugo Boss brand in a transaction valuing the Italian clothing company at 2.6 billion euros ($3.5 billion).

Permira boosted its stake in Valentino to about 40 percent after buying Paolo Marzotto's 10.8 percent for 35 euros a share, 1.6 percent above yesterday's closing price. The buyout firm said in a statement today that it will offer that price to other investors this summer. Permira will also offer to buy the 20 percent of Hugo Boss AG that Valentino doesn't already own.

Valentino, famous for designing dresses worn by Sophia Loren, is opening stores as the 160 billion-euro luxury-goods market expands. London-based Permira was required to bid for the minority shares in both companies once it held 30 percent of Valentino, and bought a stake just below that threshold from other Marzotto family members last month.

``All of the Italian luxury industry is undervalued right now,'' said Massimo Intropido, head of research at Milan-based Ricerca Finanza. ``Private-equity firms are hungry for undervalued companies. Thirty-five euros is a good price for Valentino. They are both good brands,'' he said, referring to both Valentino and Boss.

Shares of Boss, Germany's largest clothing maker, and Milan- based Valentino were both halted. Valentino last traded at 34.50 euros. Valentino shares jumped about 14 percent in the past two months on speculation the fashion house would be bought.

Hugo Boss spokesman Philipp Wolff declined to comment. A spokesman for Valentino wasn't immediately available to comment.

Histoire Handbag

Permira, which said it expects the offer to start by July and be completed by September, is acting through its Red & Black Lux SARL unit. The private-equity interest in Valentino follows TowerBrook Capital Partners LP's takeover of shoemaker Jimmy Choo Ltd. in February.

The bid ``is pretty much at the top end of where the share price has ever been,'' said analyst Michael Van Dulken at Jefferies International in London, who has a ``neutral'' rating on Valentino. ``It's a way of getting in on a very big group, getting into Hugo Boss and having the other brands. I'm pretty convinced they can leverage it up quite considerably.''

Designer Valentino Garavani, who turned 75 on May 11, founded his Rome-based fashion house 45 years ago. He sold his stake in 1998 and still designs for the company, with creations such as a red georgette silk evening gown in this year's spring- summer collection for 5,590 euros. The company's Histoire alligator handbag retails for 10,270 euros.

Renovating Brands

``With private-equity money falling around, it's the sort of home you would expect them to go for,'' said Robert Clark, a senior partner at Retail Knowledge Bank in London. ``Luxury brands, in the long term, are attractive because you can renovate them. Look what's happened to Burberry,'' he said, referring to the U.K. company whose shares have tripled since 2002.

Valentino Fashion was created in 2005 when Marzotto SpA, the textile maker founded in 1836, spun off clothing assets. The Marzottos are the fifth- and sixth-generation descendants of Luigi Marzotto, who founded the family wool mill in 1836.

Permira had also been in talks with other family members, including Stefano and Luca Marzotto. Today's statement didn't give details on those discussions.

Hugo Boss Bid

Shares of Valentino rose last month amid speculation that Permira and Washington-based private-equity firm Carlyle Group would compete to buy the company. Carlyle said May 17 it hadn't yet made a decision about bidding for Valentino.

Permira will bid Boss's average stock price during the three months before its offer is made, the buyout firm said in another statement. Shares of Metzigen, Germany-based Hugo Boss, which has a market value of 3.4 billion euros ($4.6 billion), closed at a record two weeks ago and have climbed 18 percent since March 1.

Permira's bid for the Boss shares is likely to be ``quite unattractive,'' said Sebastian Kuenne, an analyst at HSBC in Dusseldorf. ``Permira may try to get as many as possible now and lift the offer in a while to get more,'' he said.

Valentino indirectly owns almost 80 percent of the common shares and 22 percent of the issued preference shares of Boss. Valentino gets 75 percent of its sales from the German clothing company.

Hugo Boss raised its profit forecast twice last year as it opened stores and added new products. The company has expanded to women's wear, added a range of leather shoes and wallets and sped up openings of directly owned stores.

The German company sells its products in about 5,700 stores in more than 100 countries in Europe, the U.S. and Asia, according to its Web site. It produces formalwear and sports clothing as well as glasses, watches, perfumes and cosmetics.

To contact the reporter on this story: Louisa Nesbitt in Dublin at lnesbitt@bloomberg.net.

Last Updated: June 1, 2007 13:10 EDT