Upscale scale-ups: why M&As are back in vogue
This season’s must-have purchase in the luxury fashion sector isn’t a suit, a watch or a pair of shoes. It’s a whole business
As wealthy customers return to the stores at last, big players in the luxury space have already been on a shopping spree. VF Corporation acquired luxury streetwear brand Supreme for $2.1bn (£1.5bn) and Moncler snapped up Stone Island for $1.4bn at the end of last year, but these deals were dwarfed by LVMH’s tortuous $15.8bn takeover of Tiffany, which finally got over the line in January 2021. Since then, Italian group Only The Brave (OTB), which also owns Maison Margiela and Marni, has added Jil Sander to its portfolio.
While the need to expand is clearly one of the main objectives of the acquiring business, there are several other important motives. For instance, when LVMH took a minority stake in Tuscan tannery business Masoni, it enabled the conglomerate to secure its leather supply chain and ensure the quality of raw materials just before the pandemic struck.
M&As also offer potential synergies and economies of scale, with the opportunity for shared manufacturing operations and the bulk buying of ad space. Crucially, the pooling of knowledge can help in the rush to expand ecommerce operations and improve data analytics for better customer relationship management – a high priority for high-end players. And, of course, there’s a big element of risk mitigation: having a clutch of brands in a diversified portfolio will soften the blow if one or two should have a less-than-sparkling season or even slip out of fashion.
One big difference between M&As in luxury fashion and those in most other sectors is that the sellers’ brands will normally be left untouched, given their high value. It would be unthinkable for LVMH to subsume Tiffany into its existing jewellery brands, for instance.
On selling the brand he’d been building for more than 25 years, Supreme’s founder and CEO, James Jebbia, stressed that he was forming a “partnership” with VF Corporation. “This will maintain our unique culture and independence, while allowing us to grow on the same path we’ve been on since 1994,” he said.
Even though many luxury brands have been family-owned businesses for generations, some of those families are becoming interested in the idea of selling up and ceding control, according to Erwan Rambourg, HSBC’s co-head of consumer and retail research.
“This is a sellers’ market,” he says. “There’s a realisation that, if you’re running a small independent brand and you still want your family name to be in bright lights in 20 years’ time, it will be tough to achieve that on your own in such a crowded market.”
Although the big three conglomerates – LVMH, Kering and Richemont – have dominated the luxury sector’s M&A activities over the past two decades, new players are entering the fray, cheque books at the ready. Exor, the holding company for the Agnelli dynasty, took a €541m (£467m) stake in Christian Louboutin in April, for instance. Analysts believe that Exor and OTB could join the big three as the major powers of the luxury sector.
“There’s a growing number of financial buyers too,” reports Professor Scott Moeller, director of the M&A research centre at London’s Cass Business School and a former acquisition specialist at Morgan Stanley. “Debt is cheap at the moment, private equity has a lot of ‘dry powder’ and the special-purpose acquisition companies that have raised billions during Q4 2020 and Q1 2021 are seeking investments. Offering profit margins that have traditionally been about 25%, luxury brands seem particularly attractive targets to them. Because of the element of glamour, they’re also viewed as trophy assets.”
Possible deals in the pipeline
So what’s the next big deal in the offing? Mario Ortelli, managing partner of M&A consultancy Ortelli & Co, suggests that Chanel could find a buyer.
“It may be sold, but only if the planets are in correct alignment. Sound business reasons are required, plus a change of mindset among its owners, the Wertheimer family,” he says. “Burberry is also being discussed as a potential target, given that it’s a plc without a controlling shareholder.”
The M&A frenzy seems set to continue, according to Rambourg, who is sceptical about the suggestion that LVMH has put plans for further takeovers on hold.
“They’re looking at anything that moves,” he argues. “They may tell you: ‘We have other fish to fry.’ But their pan is so big that they can fry Tiffany and a lot of smaller fish besides.”
Rambourg’s colleague Anne-Laure Bismuth, director and equity research analyst at HSBC, points to recent comments by Giorgio Armani suggesting that independence is no longer “so strictly necessary” for the perennially chic label and that it might consider a joint venture with another Italian business. “Exor seems to fit that description,” she says.
One of the most significant deals possible in the luxury space would be a merger between two of the big three. It was widely reported in March that Richemont had been approached by Kering but had rejected the cash-and-shares offer issued directly by Kering’s CEO, François-Henri Pinault, to Johann Rupert, Richemont’s chairman and controlling shareholder.
With Kering’s successful record in soft luxury (clothing and bags) and Richemont’s emphasis on hard luxury (watches and jewellery), there was some logic behind the move, even though the price wasn’t right. Next time, though, it might be. Watch this space.