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M&A activity gets expensive, busy in luxury industry

February 1
1:08 PM 2014

A report on Reuters said that the lack of sellers and the growing demand of Asian and Middle Eastern cash-rich buyers who are looking to break into the luxury goods industry guaranteed the price of takeover deals in the industry to remain sky-high amid slowing growth in sales.

European brands are being favored by companies in rapidly expanding emerging markets, such as the Chinese' Fosun and Qatar Luxury Group, because of the former's long histories. This, said Reuters, has what made high-end fashion brands popular with wealthy clients at home. On the other hand, the emerging market companies will be facing stiff competition from industry leaders like LVMH and a private equity firms. As LVMH and its peers has their coffers full of cash after experiencing buoyancy in the past few years, private equity firms are banking on the luxury industry to potentially generate cash for them as the economy worldwide recovers.

It has been observed that a few popular brands such as Italian labels Versace and Roberto Cavalli and US jeweler John Hardy are now open to deals with private equity, said Reuters. However, majority of the luxury brands are having difficulty to open the doors to consider at least partnering with private equity due to its family owners.

According to industry bankers, most luxury brands could fetch a deal price of at least 15 to 18 times their core earnings before interest, tax, depreciation and amortization, or EBITDAs. Luxury brands on average are sold at around 11 to 13 times their core EBITDAs.

An anonymous financial adviser based in Paris said, "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 realize that the legal system in Europe is more reliable than in China."

On the selling side, Reuters said that conditions of luxury brand sales will determine on the outcome of the takeover deals involving Versace and Roberto Cavalli. An industry insider told Reuters that although majority of the luxury brands might not budge into selling or entering into a strategic merger with private equity, it could happen at a right price.

Citing examples, he said, "Loro Piana, also, was never for sale yet it agreed to be acquired in two weeks. 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."

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