The Business of Fashion
Agenda-setting intelligence, analysis and advice for the global fashion community.
Agenda-setting intelligence, analysis and advice for the global fashion community.
NEW YORK, United States — In the last two years, Prada, Salvatore Ferragamo, Brunello Cucinelli and Michael Kors have all launched initial public offerings, raising billions of dollars in capital by selling shares to the public for the first time. Versace is considering doing the same. And, just this week, apparel conglomerate Kellwood Company, owned by private equity firm Sun Capital Partners, announced plans to spin off and take public its fashion and accessories brand Vince.
Meanwhile, luxury conglomerates LVMH and Kering have been spending billions acquiring companies, from fast-emerging labels like Christopher Kane to storied Italian brands like Bulgari, Loro Piana and Pomellato.
So what’s happening? And why are some companies choosing to IPO, while others are selling their brands to big luxury groups?
Funding growth, while maintaining control
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“IPOs versus straight sales is a question of shareholder expectations and growth path,” Pierre Mallevays, managing partner of London-based Savigny Partners, a corporate finance advisory firm, told BoF. “For an IPO you need a continuing growth story and some — but not all — of the shareholders wanting exit or liquidity, as with Michael Kors and Salvatore Ferragamo. In some cases, an IPO may also be necessary to raise capital, either to pay back debt, or fund growth, or a combination of both, as with Prada.”
The decision of whether to go public or raise money from private investors also comes down to control. Companies that wish to raise capital, but maintain control and continue to operate their businesses typically choose the IPO route. And indeed, some have done so with impressive results. Salvatore Ferragamo and Brunello Cucinelli have yielded shareholder returns of over 100 percent since their respective IPOs, while Michael Kors has yielded a spectacular 200 percent return.
Handing over the keys
Companies that choose to sell to luxury groups, like Loro Piana and Bulgari, are driven by other factors. “In the case of an [outright] sale of the business, the shareholders take a fundamentally different view,” said Mallevays. They are generally looking for an exit. “They have taken the business pretty much as far as it will go — and the business will do better under a different owner.”
Over the past 16 years, the share of luxury businesses owned by the large luxury groups has increased by 20 percent to 65 percent of the total market, according to Mario Ortelli, an analyst at Sanford C. Bernstein, a research firm. “The market is going towards consolidation. Being a part of a group can be a great advantage for some brands,” said Ortelli, citing access to the best retail spaces at favourable rents, discounts on advertising and, of course, access to capital.
It’s not surprising that many of the latest wave of acquisition targets — including Loro Piana, Bulgari and Pomellato — are based in Italy, which lacks a major luxury group of its own and still faces major economic woes. “The Italian market is very weak, and the first class is willing to sell,” said Luca Solca, an analyst at Exane BNP Paribas.
Seeking a long-term partner
But not all of the recent investments by luxury groups have targeted established brands. For the first time in over a decade, luxury goods groups have been sniffing around the fashion capitals of London and New York, looking for young designer brands with long-term potential but lacking the infrastructure, capital and expertise to scale their businesses.
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To wit, in January 2013, Kering took a 51 percent stake in Christopher Kane, betting on the long-term potential of the wunderkind London designer, the first such investment since the luxury group backed Alexander McQueen and Stella McCartney in 2001.
“The awareness of a brand takes much time to build and the deep pockets and expertise of luxury conglomerates can accelerate the expansion of a young brand into new categories, channels of distribution and geographies,” said Dana Telsey, CEO of Telsey Advisory Group, a strategic advisory firm.
Absence of private-equity firms
Noticeably absent from the fashion space are private equity firms. But this is perhaps not surprising given the recent history of major investments gone sour. In two prominent examples, private equity firm Permira, which, in 2007, purchased a controlling share in Valentino Fashion Group in a deal worth €2.6 billion, was forced to heavily write down the value of its investment, while TPG, which acquired Bally in 1999, struggled with the company for nine years before it finally sold the business to Labelux, reportedly for around $600 million, in 2008. Though TPG made a solid return on its investment in Bally, private equity firms typically aim to exit their investments within five years.
But there is a new type of buyer on the scene. “Private investors are coming from emerging markets,” said Ortelli. The royal family of Qatar, the new owner of Valentino, is just one example. On the topic, Colin Welch, president and chief operating officer of retail investment bank Financo, added: “In my experience, there’s been a fair amount of dialogue, but you haven’t seen any action. That’s changing.”
As for what's next, expect the deal frenzy to continue. That means more IPOs (possibly Tory Burch) and more acquisitions. And maybe a hostile takeover or two. Indeed, Hermès isn't the only luxury brand coveted by the major conglomerates. Ferragamo, Prada and the seemingly untouchable Chanel, owned by the Wertheimer family, are all being closely monitored.
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