DEALTALK-High-priced M&A still in vogue in slowing luxury industry
* Luxury buyers seen paying 15-18 times EBITDA vs 11-13 before
* Asian, MidEast buyers joining industry leaders, buyout firms
* Tightly-held brands drive up prices despite slowing growth
PARIS, Jan 31 (Reuters) - A scarcity of sellers, combined with a growing number of cash-rich buyers from Asia and the Middle East, mean high-priced takeover deals are set to remain in fashion for the luxury goods industry, despite slowing sales growth.
Rapidly expanding emerging market companies, such as China's Fosun and the Qatar Luxury Group, are looking to snap up European brands with long histories - a major attraction for affluent shoppers in their home markets.
But they face competition from industry leaders such as LVMH and Richemont, whose coffers are also full after a buoyant few years, as well as private equity firms which are finding it easier to raise money as the global economy recovers, and like luxury firms' strong cash generation.
While a few brands such as Italian fashion labels Versace and Roberto Cavalli and U.S. jeweller John Hardy are in play, many others are difficult to prize away from family owners.
So even though industry growth is expected to slow for the next few years as once red-hot demand in China cools, takeover deals look set to remain pricey - turning up the heat on buyers to choose well and execute purchases flawlessly.
"Valuations in the luxury sector are likely to remain high," predicted Francois Arpels, managing director of the consumer and luxury goods practice at investment bank Bryan Garnier.
Industry bankers say that while luxury brands might have sold for 11-13 times core earnings (earnings before interest, tax, depreciation and amortisation, or EBITDA) in 2011, most are now likely to fetch at least 15-18 times current annual profit.
The signs are already there.
Though luxury sales growth slowed in the second half of last year, there was still a number of richly priced deals, such as the December flotation of Moncler, which valued the luxury ski jacket maker at about 20 times this year's EBITDA, and LVMH's July acquisition of Loro Piana for 19 times earnings.
Analysts expect cooler demand for luxury goods to continue. Boston Consulting Group sees average annual sales growth easing to 6-7 percent over the next three years, down from 11 percent in the previous three years.
But if some emerging markets are slowing, recovering economies in the United States, Japan and Europe raise the prospect of a pick up in domestic demand in these regions to complement their strong revenues from tourist spending.
"I think Asian buyers have become more bullish on the euro zone in general in the past six months, partly because China's economy has slowed down but also because they realise that the legal system in Europe is more reliable than in China," a Paris-based financial adviser said on condition of anonymity.
Analysts and bankers said likely Asian buyers were Fung Brands, backed by Hong Kong billionaires Victor and William Fung and owner of the Sonia Rykiel and Cerruti brands; Chinese real estate group Great Ocean; and Asian conglomerate Swire, No. 1 shareholder in airline Cathay Pacific and distributor of Repetto, Chevignon and Columbia in Hong Kong and mainland China.
Asian groups face competition from rivals in the Middle East, including the Qatar Luxury Group, owner of leather brand Le Tanneur, and Qatari investor Mayhoola, which bought Italian fashion label Valentino in 2012 at 20 times current-year EBITDA.
Mayhoola is currently competing against an Asian fund for Italian tailor Pal Zileri, which could fetch an enterprise value of close to 100 million euros ($136 million), including net debt of 45 million euros, a person close to the matter said. The deal could value the brand at 15 times current year EBITDA and be signed by the end of March, the person added.
Global luxury firms also have the firepower for more deals. LVMH, which published an upbeat trading update on Thursday, had 3.2 billion euros of cash on its balance sheet at the end of 2013, while Richemont had 2.4 billion euros of disposable cash at the end of March.
NEVER SAY NEVER
On the selling side, if all eyes are on the final stages of the sale of a 20 percent stake in Versace and initial talks between Roberto Cavalli and private equity firm Permira, other brands could come on the market such as family-owned Italian fashion brand Missoni, industry sources said.
Missoni, known for its bold stripes and zigzag patterns, is viewed as a potential target after co-founder Ottavio and oldest son Vittorio died last year.
Major Italian brands such Ermenegildo Zegna and Dolce & Gabbana are also regarded as attractive targets, and while they are unlikely to be up for sale, one industry banker said that hadn't stopped other deals being done at the right price.
"Loro Piana, also, was never for sale yet it agreed to be acquired in two weeks," the banker said, adding many were surprised the deal was struck without major financial advisers.
"With this deal, I think Bernard Arnault (LVMH CEO) clearly sent the message to Italian luxury brands that it they want to sell, they should talk to him first."
Italy is not the only hunting ground for buyers. Several French fashion brands are looking for funds such as Carven, which has become the darling of fashion editors under the creative stewardship of Guillaume Henry and is growing rapidly.
There is also French tailor Smalto, which has been put on the market, and fashion brand IKKS, which is in the early stage of a sale process handled by Rothschild bankers.
Some private equity firms think Change Capital could decide to sell its controlling stake in French fashion label Paule Ka, and that LBO France, which owns 20 percent of fashion brand the Kooples, might also look to sell, while they report that financial buyers have been circling fashion brand Eleven Paris.
French crystal specialist Baccarat could come into play as well, as tension rises between shareholders Starwood Capital, Catterton Partners and a small minority investor, sources close to the company said on condition of anonymity.
In the United States, private equity firm TSG Consumer Partners made a preliminary offer this month for John Hardy giving the jeweller an enterprise value of about $100 million, while rivals such as Catterton and JH Partners have also shown interest, sources close to the matter have said.
A deal could encourage others. Jewellery brand Ippolita, majority-owned by private equity firm Castanea, may seek new investors, and jeweller David Yurman could consider an initial public offering, separate sources have said.