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UPDATE 1-SMCP shares rise on prospect of ownership change

(Updates with details)

PARIS, Oct 5 (Reuters) - Shares of SMCP rose on Tuesday as the French fashion company inched towards an ownership change, prompting an analyst upgrade on expectations its financially strapped majority shareholder Shandong Ruyi was on its way out.

Chinese textile and clothing manufacturer Shandong Ruyi confirmed on Tuesday that its unit European TopSoho had failed to redeem 250 million euros ($293.35 million) of bonds exchangeable into SMCP shares.

This means the owners of the bonds will become - at least temporarily - owners of shares in SMCP, though sources say they will look to offload them to a buyer.

“The expected impending exit of embattled shareholder Shandong Ruyi removes a headwind which has raised the risk profile of SMCP since its IPO, hence we eliminate our shareholder discount,” said Jefferies in a research note, upgrading the share to “buy”.

On Tuesday, a company called Glas SAS which said it was acting as a trustee for the bondholders, said in a release to the French market regulator that it now could exercise voting rights equal to just under 29% of SMCP - effectively showing a first change of ownership is under way.

Glas said the bondholders it represents did not want as a group to launch an offer to take over the company - which any owner above 30% would have to do. This leaves them searching for a buyer for the stake, through a legal process that will be managed under British jurisdiction.

“Essentially, SMCP is up for sale,” said a source close to the matter.

SMCP’s labels, which include Sandro and Maje, are outperforming according to social media data, added the analysts.

Shares closed 6.7% higher on Tuesday after rising by around 10%, hitting their highest level in around four months.

The ownership change could be a drawn-out process, added Jefferies analysts, noting private equity players and U.S. affordable luxury groups will likely be interested in acquiring the group. The source close to the matter said the bondholders were looking for a single buyer.

Ruyi embarked on a buying spree in 2015, snapping up labels including Aquascutum, Cerruti 1881 and Savile Row tailor Gieves & Hawkes with ambitions of building an empire to rival that of luxury behemoth LVMH but has struggled under the weight of debt from acquisitions.

The sprawling Chinese conglomerate’s financial difficulties worsened with the outbreak of the coronavirus in China and it failed to secure financing for a $600 million deal to purchase Bally last year.

SMCP recently bounced back from the coronavirus crisis, with sales up 54.6% on an organic basis, fuelled by appetite in China for its contemporary French fashion, following a drop in sales of 24% last year. (Reporting by Mimosa Spencer and Silvia Aloisi, editing by Ed Osmond and Marguerita Choy)

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