European M&A: Economic woes may herald slew of deals


By Rachel Sanderson Financial Times

Luca Solca, a senior strategist at Bernstein Research, says experience shows that creating value in European luxury goods through mergers and acquisitions is anything but straightforward.

Two illusory beliefs have damaged M&A investors in the past 15 years, he argues.
The conviction that the international success of groups of brands such as LVMH and PPR could be easily replicated, and that luxury is an easy industry for new entrants such as private equity.

That said, Mr Solca still sees possibilities for M&A in Europe, the crucible of the luxury goods industry. They centre on small, niche companies, mid-tier groups and most controversially, even conglomerates such as Richemont.
“There are M&A opportunities out there,” he affirms.

Mr Solca’s suggestion that there is still value to find in European deals is well timed.

Luxury goods companies that have experienced their worst ever slump in sales during the past two years, are nervously awaiting the impact of austerity measures by European governments on an as yet fragile recovery.

Since the start of the year luxury goods sales in Europe have grown by about 10 per cent, but some dealmakers now fear that the industry’s recovery may be shortlived, as scything government cuts affect what disposable income there is still available to Europeans and Americans, the world’s biggest consumers of luxury.
Federico Aliboni, global co-head of consumer and retail corporate and investment banking at Bank of America Merrill Lynch believes the impact on the luxury goods market could be profound.

He says: “You are going to take out the two largest markets [the US and Europe], so everyone is going to rely on China, south-east Asia and Korea.

“While these are growing markets, it is going to be a long time before they can properly make up for the slowdown that the western world will be experiencing.”
That impact is already being felt.

While industry leaders such as LVMH and PPR, with extensive Asian distribution markets, continue to grow and take market share, the bankruptcies of fashion houses Christian Lacroix in France and Mariella Burani in Italy have cast long shadows.

Many groups are weakened, having shed staff, closed shops and cut production.

Yet, Claudia D’Arpizio, a consultant with Bain & Co, believes “that polarisation may well create fertile conditions for market concentration”.

As the largest luxury companies take advantage of the weakness of smaller ones in order to increase their market share, the search for capital triggers M&A and IPOs. Continued challenging conditions for lagging brands also create the risk of failures and bankruptcies, she argues.

Dealmakers agree that the opportunities for M&A in Europe, home to the world’s largest concentration of luxury goods companies, fall into at least two broad categories.

Firstly, the acquisition of high-quality niche brands, that mirror PPR’s purchase of Bottega Veneta, a high-cost, high-class house built on a manufacturer of woven leather bags, which is one of the great success stories of the luxury industry in recent years.

Pierre Mallevays, founder and managing partner of Savigny Partners, a boutique luxury goods advisory firm, says that his deal pipeline for companies worth from €30m ($36m) to €50m is booming after a hiatus during the crisis. Brands that are focused geographically are especially attractive to the private investor.

Mr Mallevays, who sold French high fashion house Lanvin to such an investor last year, says the new type of investor is a European who has made money elsewhere but is someone who has an “emotional response” to brands and is comfortable with the long-term appreciation of the luxury sector.
“This new universe of private investors looks at luxury as an alternative asset class in the €10m to €50m bracket,” he says.

The second area of opportunity is mid-tier fashion houses that have the potential to become international groups. Italy remains the best European country for deals of this size, say senior bankers.

Many high profile Italian fashion and luxury brands are still privately owned: Armani, Dolce & Gabbana, Versace and Cavalli, or Prada and Ferragamo are yet to relaunch market listings pulled during the crisis. Bulgari, a sometime target of the biggest luxury goods groups, is majority family-owned.

Still, finding a meeting point with Italy’s fashion entrepreneurs on price remains difficult, dealmakers say. With LVMH and Richemont still trading on relatively high multiples of 17 to 18 times earnings in 2010, price expectations for mid-sized deals remain high.

Bankers say more accessible targets may be those groups still in the hands of private equity, such as Valentino Fashion Group, which was bought by Permira in 2007 for an estimated 14 times Ebitda.

Although Stefano Sassi, Valentino chief executive, said this month that he did not think Permira was looking for a buyer, on a usual private equity timeframe, it will be seeking an exit soon enough.