* Luxury buyers seen paying 15-18 times EBITDA vs 11-13
* Asian, MidEast buyers joining industry leaders, buyout
* Tightly-held brands drive up prices despite slowing growth
By Astrid Wendlandt
PARIS, Jan 31 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
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.