By  on May 21, 2007

MILAN — Carlyle Group is no longer interested in buying Valentino Fashion Group SpA, a source close to the U.S. private equity company told WWD.

By dropping out of the bidding process, Carlyle Group ended a potentially costly takeover battle for control of VFG. Rival European equity firm Permira has offered to buy all of VFG for 35 euros, or $47.60, a share and already holds 29.6 percent of the fashion company.

At that price, it will cost Permira 2.6 billion euros, or $3.5 billion, to buy all of VFG. But the expenses won't end there. Once it secures a majority stake in VFG, Permira will be forced to launch a cascading bid for outstanding shares in Hugo Boss AG. VFG owns 50.9 percent of Hugo Boss. At current market prices, buying the remaining shares would cost another 1.7 billion euros, or $2.3 billion, making a total purchase price of $5.8 billion for control of Hugo Boss.

That price tag was too steep for Carlyle, said the source close to the fund. Carlyle is "disciplined" when it comes to investments, the person added.

Dashed hopes of a Carlyle counter bid sent VFG shares down 4.3 percent on Friday to close at 35.15 euros, or $47.80.

In any case, Permira looks poised to secure majority control of the fashion company. As reported, the equity fund, Europe's largest, said late Thursday that it began exclusive talks with the Marzottos to acquire the family's collective stake of about 24 percent in VFG. The negotiations expire May 28 and, if successful, would lift Permira's VFG stake to 53.6 percent.

Alessandra Coppola, an analyst with Standard & Poor's in London, warned that the Valentino deal, along with LVMH Moët Hennessy Louis Vuitton's acquisition of China's Wen Jun Distillery this week, could initiate a cooling period for merger and acquisition activity in the luxury goods industry.

"I would view these operations cautiously because history has a tendency to repeat itself," Coppola said, referring to the spending sprees of the Nineties and the subsequent slowdown for deal-making. "If demand [for luxury goods] contracts, and already we are at historic highs, then there's the risk of another bubble burst."

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