A Cozy Deal At Benetton?

Publicly owned Benetton buys the family's sports outfit

The four Benetton siblings personify family entrepreneurship, Italian-style. In less than 20 years, they have turned a small wool-dyeing operation into the Benetton Group, one of the world's premier clothing brands. With more than 7,000 outlets in 120 countries and $1.8 billion in sales, Benetton has brought riches to its founding family and has become the emblem of northeastern Italy's rebirth as one of the wealthiest corners of Europe.

On July 15, however, the Benettons struck a deal that, some observers say, may take family entrepreneurship too far. The publicly traded Benetton Group, in which the family has a 72% stake and which controls the core clothing business, announced plans to pay $330 million in cash for Benetton Sportsystem, a grab bag of sports equipment outfits including such well-known names as Rollerblade, Prince tennis rackets, and Nordica ski boots. All are strong brands, and the deal will increase Benetton Group sales by 50% in one fell swoop.

The problem is, the seller is none other than the Benetton family itself. And that has some Italian bankers wondering if the transaction isn't designed mainly to reduce debt at the family's Edizione holding company--the seller of Sportsystem. "The deal boils down to using Benetton Group cash to cover the debt upstairs," says one Milan-based investment banker. In recent years, Edizione has jumped into supermarkets, real estate, fast food, and venture capital, leaving the holding company highly leveraged.

SAVVY OR SELF-SERVING? On the other hand, debt-free Benetton Group, which earned $145 million last year, is awash in cash. The stock market seems to think Benetton could have done something better with it: The company's American depositary receipts fell 6.2% to $30.25.

But Luciano Benetton, the oldest brother and chairman of the group, says the sale makes perfect sense. He says the buyout is at a fair price, and the proposed deal has received a fairness opinion from four investment banks: Milan-based IMI SIGECO, Salomon Brothers, SBC Warburg, and Morgan Stanley.

Moreover, says Benetton, the deal will pay off because of synergies between apparel and sports equipment. "You take Benetton's power, its extremely efficient sourcing and distribution, and its knowledge of world markets, and you apply that to brands like Nordica, and you can develop a sports clothing brand as well as a sports brand," says Keith Wills, retail analyst at Goldman, Sachs & Co. in London.

The Benettons are already experimenting with merchandising ski boots and clothes together. At the flagship Manhattan store, apparel is on the main floor and sports equipment upstairs. In Europe, the group is planning to launch Playlife stores to sell sports equipment and sports clothing.

So, is the deal a powerful marketing move or an asset shuffle? It's too early to say. If the Benettons boost shareholder value with the deal, the stock markets will applaud. But they could have some explaining to do if they can't make sports and clothing into a comfortable fit.

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