Apax Partners, the London-based private equity firm, has abandoned its bid to take a stake in Escada AG, the embattled German fashion company. Citing deteriorating market conditions, Apax stated that
"the recent evolution of the stock price and the weakness of the international financial market do not give a basis for pursuing the project."
This is absolutely the right decision. Not only has Escada become somewhat of an industry basket-case in recent years, on Wednesday the company also revised its earnings projections for year ending October 31 downwards yet again. EBITDA margins are expected to fall by about 25% compared to 2007. The company cited recessionary conditions in the USA and other key markets as the reason behind the revisions. Escada's shares fell by 10.8% on Wednesday to 14.35 euros.
This does not bode well for Cavalli, another fashion house that is reportedly in talks with private equity. Blackstone, The Carlyle Group, Candover, Cinven and Permira are all interested in taking a stake in the Italian company. While the Cavalli business is in better shape than Escada, declining market multiples mean that the flamboyant Mr. Cavalli may not get the valuation he is expecting. He has already turned down offers in the past which valued his business at more than 1 billion euros, which some think was a good deal.
There may be a silver lining in all of this market turmoil for the major luxury groups. Now that valuation multiples have fallen, strategic investors, may now enter the fray after largely staying out of the mix over the past few years, due to the heavy competition from private equity. Public companies like Burberry and Tiffany, whose valuations have dropped considerably, are particularly vulnerable.