Upscale scale-ups: why M&As are back in vogue

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.

Bling dynasty

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.