Luxury sector set for spate of deals

Models display creations during Milan's Fashion Week, February 20, 2006. The global luxury goods sector is heading for a spate of deal making with mid-sized firms, particularly in Italy, eager to raise capital and expand into booming emerging economies, analysts say.

LONDON (Reuters) - The global luxury goods sector is heading for a spate of deal making with mid-sized firms, particularly in Italy, eager to raise capital and expand into booming emerging economies, analysts say.

Merrill Lynch's Antoine Colonna, the No. 2 ranked equity research analyst in Europe in a recent industry survey, named 35 companies whose ownership could change hands in the next 18 months in a report released to the press on Thursday.

His "best guess" for those luxury houses on the starting block for either an IPO or a partial or full trade sale are some of fashion's best known brands -- Armani, Dolce & Gabbana, Ferragamo, Prada, Roberto Cavalli, Versace, Harry Winston, Bally, Ermenegildo Zegna, Brioni and Loro Piana.

"If history is any guide, and if our base scenario of a further expansion of big caps multiples materializes in coming months, the number of transactions should also increase significantly in 2008," Colonna said in the note.

Investors should play the predators rather the targets with top picks LVMH (LVMH.PA), Swatch Group (UHR.VX), Luxottica (LUX.MI) and Burberry (BRBY.L), Colonna said.

Fuelling the push for luxury deals is a surge in the new super rich in emerging markets from China and India to Russia.

World wealth grew 11.4 percent to $32.7 trillion in 2007 from 2006, providing the first double digit rise in seven years, according to the Merrill Lynch Cap Gemini World Wealth Report.

Meanwhile, the world's high net worth population -- whose hunger for monogrammed luggage and $10,000 gowns is behind the industry's double-digit sales growth -- surged to 9.5 million, up 8.3 percent, with Singapore and India leading the way.

BACK TO THE FUTURE?

The last such boom, nearly 10 years ago, culminated in conglomerates PPR (PRTP.PA) and LVMH Moet Hennessy Louis Vuitton (LVMH.PA) slugging it out for control of Gucci Group.

But Colonna and other analysts are skeptical a battle on that scale will erupt this time with industry heavyweights proving more cautious in their dealmaking since the slump they experienced after September 11, 2001.

One exception could be France's Hermes International (HRMS.PA) which is trading at nearly 30 times next year's earning supported by consolidation talk. Any suggestion it may be on the market would set off an auction, analysts said. Colonna said he didn't believe it was for sale.

Bernstein Research's Luca Solca, a former Italian fashion industry executive, agreed the strength of the fashion and luxury goods cycle would lead to increase in deals.

PPR, LVMH, Richemont (CFR.VX) and private equity were his predictions as the most likely buyers and they could seek to acquire niche players with international development potential, he wrote in a report published last week.

Both Solca and Colonna also argued newly rich Chinese, Middle Eastern or Russian investors who are looking to diversify their investments could target the sector.

But gyrations in global markets may yet cut short the party.

HSBC upgraded Burberry (BRBY.L) and Coach (COH.N) on Thursday following the sector's sell off at the start of the global credit crunch. But HSBC analyst Antoine Belge cautioned if credit woes deepened global wealth would deteriorate and an end was in sight to the champagne and handbag-buying boom.

"We believe earnings growth is set to slow, as the consumption trends seen since 2005 are not sustainable, even if the world economic slowdown is only gradual," Belge wrote.