By and  on February 23, 2006

PARIS — Could the high-flying fashion and luxury sector, which has lately sat on the sidelines of the mergers and acquisitions arena, be getting back into the game?

Absolutely, say many analysts and dealmakers, who are predicting an uptick in transactions this year from a broader array of business players, with beauty, jewelry, innerwear and accessories likely to be the most active categories. Today's expected announcement of Change Capital's purchase of Jil Sander could merely be the beginning.

Detractors argue the industry is already quite consolidated, and the climate doesn't favor big purchases — excepting industrial assets. Yet many forecast a new era of smaller and more strategic deals from lots of left field candidates beyond the "big three" luxury players: LVMH Moët Hennessy Louis Vuitton, PPR and Compagnie Financière Richemont. They say a preponderance of cash and rapid growth in luxury goods in the U.S. and emerging markets also set the stage for more transactions.

"I do expect activity to pick up in 2006," said Pierre Mallevays, managing director of Savigny Partners LLP, a corporate finance and M&A firm in London. "People are starting to look around again."

"I believe from both from a supply and demand standpoint, M&A will resume this year in the sector," agreed Antoine Colonna, luxury analyst at Merrill Lynch in Paris. "The main difference with the two previous years from a demand standpoint is balance sheets are strong again and, from a supply standpoint, valuations are closer to peak levels."

Various other factors also suggest an uptick, including a need for groups to establish a balance of power in all product categories — and to find additional growth drivers. There are also succession and management issues, particularly in Italy, and the growing importance of scale in luxury goods, Colonna noted.

Mallevays is dubbing 2006 a year of "smart" investments, in contrast to the feeding frenzy of 1999 to 2001 that led luxury groups to a long period of digestion, and in some cases, indigestion.

"They will buy small to mid-sized companies that are very complementary to existing brands or units," he predicted, citing as recent examples Bulgari's purchase of a watch strap supplier and handbag maker and Steve Madden's acquisition of the handbag and belt designer/manufacturer Daniel M. Friedman & Associates. In the same vein, PPR recently indicated it was eyeing nonapparel catalogues in the U.S. to complement its Redcats mail-order operations.

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