After the Ermenegildo Zegna Group revealed plans to list on the New York Stock Exchange (NYSE) by the end of the year, industry eyes are on Italian luxury fashion.
Zegna will enter an agreement with a US special-purpose acquisition company (SPAC), launched by European private equity group Investindustrial and chaired by former UBS chief executive Sergio Ermotti, giving the group a value of $3.2 billion and puts an end to over 100 years of private ownership for the family business, while the Zegna family will retain a stake of approximately 62 per cent. They expect to raise about $880 million and will use the funds to reinforce Zegna’s menswear business, expand in China and the United States, and help buy other brands after its $500 million purchase of American luxury label Thom Browne in 2018.
“We could have stayed private for another 100 years, but the timing is perfect and the luxury business is getting very challenging,” says Gildo Zegna, chief executive and grandson of the founder. “[The backing of supportive partners] will create new opportunities in the future. The goal is to bring an iconic, sold, forward-looking, well-managed Italian family business to the US market… which has seen growth recently and will remain a key market for the company.”
Other recent deals have gone through for Italian brands, signalling investor interest in funding brand expansion to compete with larger global players. L Catterton has taken a majority stake in Etro. John Elkann, scion of Italy's Agnelli family, has been exploring a possible link-up with fashion designer Giorgio Armani as part of a plan to build a luxury conglomerate potentially anchored around Ferrari, Reuters reported citing five sources close to the talks. (However, Armani is more likely to contribute his business into a foundation-style entity, rather than let another entrepreneur use his company as a stepping stone to build a private luxury empire, critics say.)
Some observers are rooting for the idea of “an Italian champion” after years of Italian brands being acquired by LVMH, Kering or even the US-based Michael Kors, when it announced it would buy Versace and rename the group as Capri. “A lot of the independent companies left are Italian, so I think there’s a case to be made for the emergence of an Italian champion, whether it’s Exor, Moncler or someone else,” says Erwan Rambourg, a luxury analyst and author of Future Luxe: What’s Ahead for the Business of Luxury. While there have been questions around competition for assets from foreign countries like China, he suspects that European fashion brands will want to keep the business closer to home. “There's a lot of interest in the space because people understand the compounding growth nature of premium consumer brands, but I think European luxury brands will likely sell to other European luxury organisations.”
Those involved in the Zegna deal say the company doesn’t plan to compete with the likes of rival groups LVMH or Kering and become a consolidator of Italian luxury brands, according to Andrea C. Bonomi, founder of Investindustrial and chairman of the Industrial Advisory Board. “There is a lot of pressure on us, as the leading investor in southern Europe, and on Zegna, to operate a conglomerate — but that is not what we're going to do. It doesn’t fit. Zegna is going to build the business both organically and through acquisitions, but it will not be an agglomeration of brands.” The intention is to invest in brands that are coherent with the group’s DNA, he says. “This is Zegna building Zegna.”
Experts say more luxury fashion mergers and acquisitions and IPOs are to come. The pandemic is a key factor, having caused consumers to buy less and buy better, says Rambourg. Luxury is still a “recruitment market” that isn’t driven by repeat purchase but mostly by consumers who are buying for the first time, he explains. In that sense, shoppers are favouring bigger brands like Tiffany, Rolex or Louis Vuitton, which are the leaders in their respective categories and who they therefore trust. “As a result, the conglomerates are becoming even bigger, and smaller, independent or second-tier businesses have been struggling.”
Independent brands, therefore, are thinking about how to ensure their relevance. “You have to find a way to be top of mind for global consumers,” says Mario Ortelli, founding partner of luxury advisory firm Ortelli & Co. “In a nutshell, scale matters more than ever, and that is why there is a consolidation of luxury M&As.” He points to a new wave of brand deals, such as Moncler and Stone Island, and Renzo Rosso’s OTB and Jil Sander. “These smaller groups are not in direct competition for targets with luxury conglomerates, which tend to look at big brands that are over €1 billion. So these alternative companies can buy brands in the range of €50-300 million of revenue that still benefit from scale,” he says.
SPAC deals, which are on the rise across global sectors, could be an interesting opportunity for luxury brands but can be risky. After a SPAC is created and money is raised for the investment, the blank-check firm generally has two years to identify and merge with a company and take it public. If the SPAC fails to complete such a merger, the money is returned to initial investors and the entity that created the blank-check firm loses any capital put into the process. Zegna’s SPAC deal contrasts with typical acquisition deals, as the transaction allows the company to go public yet remain controlled by current shareholders.
“We have to be very careful,” says Bonomi. “It's a fact that unless luxury companies have momentum, like Thom Browne, or they have scale, like Zegna, going to the public market through a SPAC or directly is not very easy, because you have to be able to predict quarterly performance and you need to have a team that will interface with the market properly.”
Fashion is more of a risky business when it comes to SPACs because it can be harder to predict, says Marco De Benedetti, managing director and co-head of Carlyle's European buyout group, who oversaw the investments in Supreme, End Clothing and Beautycounter. “If you look at the fashion world, there were very few listed companies 15 years ago, and now there are many. Private equity also didn't play in the space. In fashion, you have some brands that are a short lived phenomenon, but the more established brands are presumably a bit less volatile than others."
“Whilst the SPAC rage will undoubtedly leave more than a few fingers burnt, the InvestIndustrial and Zegna SPAC manages to square the circle in providing in one swoop InvestIndustrial with a minority investment in Zegna, a listing for the company and leave the family with a controlling stake, all at the same time,” says Pierre Mallevays, co-head of merchant banking at Stanhope Capital.
Zegna, with its heritage, craftsmanship, strides in sustainability and track record for developing brands, as well as following through on its own growth plans, is in a good place, Bonomi believes. The private equity firm was also impressed by Zegna’s acquisition and successful running of Thom Browne, which demonstrated the strength of the group’s M&A strategy and its ability to develop brands, he says. The deal has been in the works since January. “Zegna immediately opened their doors and viewed it as a great idea,” he says.
Growth for the Zegna group will come in various forms. The group sees an opportunity to increase its digital presence and solidify its reputation as a luxury brand, he says. Focusing on textiles and specialised Italian skills will also be key. It’s why Ermenegildo Zegna and Prada acquired a majority stake in Italian cashmere producer Filati Biagioli Modesto last month, Zegna says. While the financial details of the deal were not disclosed, the agreement shows Prada and Zegna now each own 40 per cent of the cashmere company.
“Knitwear will be the next booming sector in the luxury industry. It’s a textile essential and a big opportunity,” says Zegna. The group plans to pursue further investments in this area if they come along, but “it needs to fit with our culture and needs to be integrated within our structure,” he says. “Right now we don’t have anything, but we have a lot of paper and stone on our table, and whenever we decide to go ahead, it needs to be another Thom Browne.”
Luxury M&A and the future of consolidation
At present, it’s more of a seller’s than a buyer’s market, Rambourg observes. From a buyer’s perspective, however, it makes sense to diversify their assets or to fill a gap in their business. He points to LVMH’s deal with Tiffany, which benefited both companies. Buyers are also enjoying favourable rates that have “rarely been this low,” he adds. “When you’re negotiating debts to purchase assets, it’s very cheap in the US and certain parts of Europe.” It makes all the more sense given that most buyers don’t think about the immediate few years but the next generation, he says. “The issue of paying a high multiple becomes relative if you have a 15 to 20 year view, versus if you’re just going in for the next six months.”
Carlyle Group’s De Benedetti agrees: “If you look at the listed companies and valuations, they're at a record high. I would argue that it's more of a seller's market in the sense that there's plenty of capital chasing very few deals. It is also hard to find a target. The reality is that for two years, nothing happened, so you have a bit of pent up demand.”
While the key global players are still LVMH, Kering and Richemont, there are also emerging alternatives beyond the usual suspects, says Rambourg. He points to Moncler as a company that might do more, having fully acquired sportswear brand Stone Island. Exor, the holding company owned by the Agnelli family, is also being closely watched, having taken varying stakes in Christian Louboutin and Shang Xia. “The move raised a lot of eyebrows and people started to say, ‘there’s a new kid on the M&A block’,” he says. “I would very much doubt they would leave it at that. It would be logical for them to look at other assets for sure.”
Richemont could emerge as another big M&A player this year, says Ortelli. “It is among the big players in which it is not clear what will be the long term commitment of Johann Rupert, who is 70 years old and still involved in the business, but less in the day-to-day management. His family are also not so involved in the company.” There are also key acquisition targets on the market, such as Burberry, as it is “of relevant size” and “is potentially a more appealing target now that its share price can go down due to management transition with the departure of Mr Gobbetti,” he says. Observers will be closely watching its stock price to determine whether it’ll be a target for acquisition.
Private equity firms like Carlyle however prefer small, younger brands. “As an investor we're looking for companies that are a bit earlier in that cycle and try to help them. We partner with great new management teams to transform them from a local business to more of a global player. We are always on the lookout for the next thing as opposed to brands that are already very established," says De Benedetti.
The billion dollar question is how to succeed in luxury, De Benedetti continues. “The speed of change in consumer behaviour today is rapid. They want something unique and different, and they want it now. [As a brand] you can design a great product, and probably you can build a $100 million business,” he says. “But if you want to build a billion dollar business, product is not enough. You need something else, and that is where we can be helpful. They have this beautiful product, but they don't have everything else, and they don't know how to build and scale it.”
What’s clear is that the battle for scale will only heighten, Ortelli says. “The big players that have already scaled are unrivaled and difficult to catch, but it does not mean that this is the only model to be successful in the market. You can also have brands that are smaller and with additional resources they can reach scale through acquisitions and further develop their brands.” One of the few remaining independents was Etro, Ortelli points out, and that is being acquired by L Catterton. However, he sees every independent brand as a potential target, because with the business of scale, being part of a larger organisation presents the opportunity to be more competitive.
“The Covid-19 crisis accelerated the disruption of distribution channels. Ironically, this helped reinforce the domination of the superbrands. The next tier of big brands needs to scale up to take advantage of growth markets and not lose relevance,” adds Mallevays.
Source - https://www.voguebusiness.com/companies/behind-italys-luxury-ma-deal-surge-is-a-conglomerate-next
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