PARIS, France — Kering is expected to pursue a dual track IPO-auction to spin off Puma. The move would involve preparations for a sale of Kering's controlling stake on the stock market while simultaneously inviting bids for the German sportswear brand, investment bankers in Paris and London say.

Few expect anything to happen this side of Christmas. When investors grill Kering’s management about Puma after the French group’s third-quarter trading update on Tuesday, they will not be holding their breath for a deal to be announced. Unless, of course, Kering suddenly takes the view that Puma is ready to be marketed to investors after the sportswear brand upgraded its guidance last week for the third time this year.

Still, Kering knows that it will be in a stronger position to get a rich valuation for Puma once the brand has several quarters of improved performance behind it. This means nothing is likely to happen before 2018, barring a surprise offer that François-Henri Pinault, the chairman and chief executive officer of Kering, could not refuse. Kering and Puma both declined to comment.

Bavaria-based Puma, with a market capitalisation of around 5.2 billion euros and more than 13,000 staff, is a big company to take on, limiting the pool of potential acquirers. What’s more, private equity firms and family offices are likely to be put off by Puma’s high valuation. The company is trading at around 30 times next year’s forecast earnings, a sizeable premium to rivals Nike (19 times) and Adidas (22 times).

Industry peers such as VF Corporation, which owns Vans and North Face, and Chinese sportswear player Anta, are not expected to come forward as serious bidders. Anta looked seriously at Puma in the past two years, several bankers said, but no agreement was struck, while VF Corp, which knows the footwear industry well, is said to be considering other targets.

“All the big banks have been approaching various people about buying Puma for the past two to three years,” one London-based banker said on condition of anonymity. “So, if there was an obvious buyer, we should be close to a deal by now.”

Back in December, Jean-François Palus, Kering’s managing director, told staff that Puma would be sold within 18 months, one person close to the group said on condition of anonymity.

“Internally, Kering already presents itself like a luxury-focused group. It no longer considers Puma as part of the group,” the source said, adding that Kering was no longer actively investing in Puma in terms of senior staff time and effort. Kering’s progressive disengagement from Puma became clear in April when Pinault resigned from Puma’s board, even though he told the press at the time that the move was intended to cut costs and simplify the board’s decision-making by having fewer members.

Deal Structure and Process

“I think a dual track is the most likely route as it allows Kering to keep options open and maximise its return on investment,” said a Paris-based investment banker with close ties to Kering on condition of anonymity.

The transaction would take the form of a secondary offering and involve a roadshow and book-building process just like any traditional initial public offering. Puma is already listed on Frankfurt’s Deutsche Börse but Kering could also decide to sell its Puma shares elsewhere, such as New York, London or Hong Kong, to widen its investor base.

Kering, which owns 86 percent of Puma, would need to cut its stake to below 50 percent to stop consolidating Puma’s results into its own, implying that it would have to sell a minimum of 37 percent.

This would represent an offering of around 2 billion euros at current market prices — quite a lot for institutions to soak up. But the IPO of Italian tire maker Pirelli in September, one the biggest in Europe so far, was larger, raising 2.6 billion euros, and went through relatively successfully after it was priced at the bottom of an already narrowed indicative range.

Depending on market conditions, Kering would be expected to offer a small discount of around 5 to 10 percent to whet investors’ appetite, bankers said.

A dual track is the most likely route as it allows Kering to keep options open and maximise its return on investment.

At the same time, Kering could hold an official auction process for Puma, which some bankers said could attract interest from potential buyers, possibly from China, until the last minute. The dual track route has worked well in the past for other fashion and sportswear companies, such as French fashion group Sandro, Maje, Claudie Pierlot (SMCP), which went ahead with a Paris listing this month after pulling its IPO last year. The IPO process last year helped it put pressure on Chinese buyers Shandong Ruyi to agree on a price for the company.

That route was also favoured by Moncler. Its preparations for an IPO helped get French private equity firm Eurazeo to agree on a valuation at which to buy up Carlyle's 45 percent stake in Moncler in 2011. Moncler floated two years later.

“I think it is likely that Kering management has started to think of an IPO for their Puma stake as there is appetite in the market right now… I know many funds, [us] included, who see growth potential in Puma and would buy their paper,” one Geneva-based luxury fund manager said, declining to be named.

Floating Kering's controlling stake would improve the liquidity of Puma shares, currently at low levels since only 14 percent of the company is in free float. This limits the ability of big pension funds to buy large positions of several hundreds of millions of euros. Bankers said they did not expect Kering to distribute Puma shares to shareholders — like LVMH did with its Hermès shares — as Kering was keen to keep its options open and raise cash to pay down debt, replenish its coffers and possibly return some of it to shareholders via a share buyback or special dividend.

Puma’s Renaissance

A Puma share offering would allow investors to bet on the company's renaissance, buoyed by innovative products and partnerships with celebrities such as Rihanna and Usain Bolt and prestigious football clubs like French Ligue 1 football club Olympique de Marseille.

Puma’s sales growth has recovered significantly since last year. On Wednesday, Puma said like-for-like sales in the third quarter had climbed to 17 percent, against 15.7 percent at the half-year and 10 percent last year. Meanwhile, operating margins (which stood at 5.7 percent at the half year) are set to double from 3.5 percent to 7 percent between 2016 and 2019, according to HSBC.

“If Puma can show a good track record with sales picking up and margins improving, it would become an easier case to make for investors,” said Erwan Rambourg, global co-head of consumer and retail research at HSBC.

Rambourg, however, says that for margins to continue rising, sales growth would need to follow and Puma would have to invest substantial amounts of capital into expanding its retail presence and profile in China and in the United States, its two most important markets.

“If Kering is preparing itself to sell Puma, I am not certain they would be ready to make such big investments,” Rambourg said. Uncertainty around the brand’s future ownership has been weighing on the brand’s growth, industry observers have said, as some retailers have been adopting a wait-and-see attitude to stocking the brand.

Pinault has been taking his time to sell the business because he wanted to wait for Puma’s valuation to reach at least the level at which he bought it in 2007, or 3.30 euros a share. That point was reached in mid-April when Puma’s shares topped a high of 3.47 euros after the company raised its full-year guidance. The shares closed at nearly 351 euros on Monday.

If Pinault sells Puma, which also owns the rarely discussed Cobra golf business, investors will also expect him to sell Volcom, the Californian surf, skateboard and snowboard brand he bought in 2011 for more than $600 million before it fell in value, and it is unlikely to recover any time soon having suffered from poor trading, particularly at US department stores.

Once complete, the disposals will mark the end of Pinault’s decade-long foray into sports, a move through which the 55-year-old businessman wished to make his mark after taking the chief executive reins of Kering from his father François, one of France’s most high-profile entrepreneurs.

It was François Pinault who, after having made money in timber and diversified into retail with Printemps, Fnac and mail order company La Redoute, led the group's investments in luxury in the late 1990s and early 2000s alongside Tom Ford and Domenico de Sole. He was attracted by the sector's margins and growth prospects, which were much higher than those in the retail sector. Until 2013, Kering was called PPR, short for Pinault-Printemps-Redoute.

Kering’s acquisition track record over the past decade has not been particularly strong, analysts said, making the market wary of the group accumulating cash from its Puma sale that could be used for any future sizeable acquisition.

Italian tailor Brioni, bought in 2011, is struggling to reinvent itself after an unsuccessful revamp under Justin O’Shea, an unlikely choice for creative director and whose gothic aesthetic alienated core customers. Under François–Henri, Kering (then PPR) also bought control of watchmakers Girard-Perregaux and JeanRichard in 2011, but they have yet to become important players.

In 2014, the company splurged on the acquisition of Ulysse Nardin (for which it is reported to have paid as much as 700 million euros) just as the luxury watch sector was entering its worst downturn in decades. As revenues fell, the brand cut staff to stem losses. In jewellery, industry sources say Pomellato and Queelin are doing comparatively well, but like Boucheron, they lack investment to reach the scale that would boost margins.

As for Puma, some industry observers say Kering waited too long before getting seriously involved in the business’ day-to-day affairs. The group bought Puma in 2007, but only realised the brand needed a strategic reboot in 2012. It had focused too much on becoming a fashion brand, losing its technical edge in key areas such as running shoes, allowing rivals like Asics and New Balance to gain market share, and bigger competitors such as Adidas and Nike to consolidate their lead.

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