Milan Models Eclipsed by M&A Chatter as Prada Deal Sets Stage
Men’s spring-summer 2012 in Milan may be the first fashion season where clothing and accessories are the last things on people’s minds.
As PPR SA hunts assets, Prada SpA and Salvatore Ferragamo SpA court investors for initial public offerings and a French investment firm snaps up Moncler SpA, the chatter in Milan is of who’ll be next to list or get bought. Suitmaker Corneliani kicks off four days of shows in the Italian city tomorrow.
Potential targets may include Burberry Group Plc (BRBY), Mulberry Group Plc (MUL) and Tiffany & Co. in the medium term, according to John Guy, an analyst at Royal Bank of Scotland Group Plc in London. LVMH Moet Hennessy Louis Vuitton SA (MC)’s 4.3 billion-euro ($6.1 billion) purchase of Rome-based jeweler Bulgari SpA (BUL) may spark a wave of consolidation as some companies seek to narrow the gap with their larger peers.
“Expect more mergers and acquisitions and IPOs,” said Armando Branchini, vice chairman of Intercorporate, a Milan- based consulting firm specializing in luxury goods. “When the favorable winds blow, all the sailors hoist their sails.”
A lack of scale or expertise limits smaller companies’ ability to build brand recognition and tap demand in Asia and may lead some to seek alternative paths to growth, said Pierre Mallevays, managing partner of Savigny Partners LLP, a London- based advisory firm specializing in luxury goods.
‘Winner Takes All’
China is “a kind of winner-takes-all market where the bigger the brand, the better known you are, the more infrastructure you have on the ground and the more people want you,” Mallevays said. “There’s a virtuous circle of success that the big brands have there and it has only increased the value creation” gap with smaller brands.
Spending on high-end apparel, accessories and other goods may rise 8 percent this year to 185 billion euros, excluding currency swings, Bain & Co. said in May. Luxury sales in mainland China, which doesn’t include Hong Kong, Macau or Taiwan, may surge 25 percent to 11.5 billion euros on the same basis, keeping it the fastest-growing market, according to the consultant.
The largest companies, including Paris-based LVMH, offer the most attractive valuations amid expected positive earnings momentum, UniCredit analysts wrote in a June 15 note.
Plans to sell stock may be put on hold until stock markets rebound. Moncler, a maker of $1,000 ski jackets, scrapped an IPO in Milan because of market weakness and opted to sell a stake to Eurazeo.
When the moment is right, “Burberry is the obvious candidate” for a takeover and would fit nicely in Cie. Financiere Richemont SA’s portfolio, which includes Dunhill and Chloe, Guy said. Burberry, which gets about 30 percent of sales in the Asia-Pacific region, appeals to consumers there because of its craftsmanship and “Made in England” heritage, even though it has fewer stores than peers in the region.
“That makes Burberry very attractive to a much larger player,” Guy said. “Mulberry also has “enormous potential.” Alexa bagmaker Mulberry yesterday reported more-than-fivefold growth in full-year profit.
Jenna Littler, a spokeswoman for Burberry, declined to comment. An outside spokeswoman for Richemont didn’t immediately return a call seeking comment. The maker of Montblanc watches doesn’t plan to use equity to fund acquisitions, Chief Executive Officer Johann Rupert said last month.
PPR (PP), which is selling retail businesses to focus on luxury, sports and lifestyle, is targeting mid-sized companies with high-growth potential. The interest in luxury companies by established investors and new ones from Asia is forcing up valuations, which is “potentially a sign of strong activity to come,” Mallevays said.
LVMH paid a 60 percent premium to snag Bulgari, the world’s third-largest jeweler. Including debt, that was a multiple of 28.2 times earnings before interest, taxes, depreciation and amortization, more than LVMH had paid for any other company.
PPR, which owns Gucci and Balenciaga, may have to also pay up or risk losing out in its bid to add to its watch and jewelry portfolio. “Interesting” luxury targets are usually family controlled, PPR CEO Francois-Henri Pinault said last month. Many owners of companies that he may be interested in, including watchmaker Patek Philippe, aim to stay independent, according to Barclays Capital analysts including Victoria Lee.
That may change amid Swiss regulatory changes. Swatch Group AG will from next year cut component deliveries as it seeks to end a regulatory requirement that it sell such parts to rivals. If that happens, the financial burden of investing in their own research and development and manufacturing capabilities may force some smaller companies to sell, Guy said.
Independent companies wishing to remain so may pursue IPOs as a path to fundraising instead. Ferragamo, the Florence, Italy-based shoemaker, spurned suitors, both private equity and competitors, in favor of selling shares to the public, Chairman Ferruccio Ferragamo said this week. Ferragamo is set to start trading in Milan on June 29.
Rivals will be watching the success of both Ferragamo, whose shoes have been worn by actresses Marilyn Monroe and Jennifer Lopez over the company’s 84-year history, and Prada, which is said to have raised about $2.1 billion in a Hong Kong initial public offering after the company sold shares at the low end of its price range amid a global market slump. Prada shares will start trading on June 24.
At the low end of the price range, Prada is valued at about 23 times estimated earnings while LVMH trades at about 18.55 times. PPR is valued at about 13.5 times.
Question of Price
Most deals involving medium-sized companies that lack the financial or human resources to tap growth in China, will be with investors who have expertise and contacts in the region to help manage the “skyrocketing” costs for employees and real estate, Mallevays said.
The Ferragamo family in March sold an 8 percent stake in the shoemaker to Hong Kong businessman Peter Woo and agreed to raise its stakes in distributors based in China, Hong Kong, Taiwan and Macau.
How long potential targets stay independent may be partly a question of price, according to Guy.
“Luxury-goods stocks have had a phenomenal run since the financial downturn, but ultimately there is more to go for if you’re a smaller player and you’ve still got big opportunities to grow size and scale relative to peers,” he said.
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