By  on September 4, 2014

MILAN — Safilo Group SpA lost more than 25 percent of its market capitalization on Wednesday, a day after luxury group Kering revealed plans to take back control of its eyewear business.

Safilo shares dropped 25.76 percent on the Milan Stock Exchange to close at 11.90 euros, or $15.61 at current exchange. At one point on Wednesday, trading in Safilo’s shares was suspended, and, by 11:30 a.m., they had slumped 30.6 percent, to 11.12 euros, or $14.59.

Citi analysts Thomas Chauvet and Mauro Baragiola in a report on Wednesday said the “strategic move aiming at building in-house eyewear expertise…may have a big impact for Safilo — the second largest eyewear manufacturer in the world. Investors might wonder if this is a new trend potentially impacting Luxottica. We believe it is not.”

Chauvet and Baragiola reason that the brands in Luxottica’s stable are relevant but independent, citing the Armani group, Chanel, Ralph Lauren, Burberry, Prada, Tiffany and Dolce & Gabbana. They are “not at risk” as they “might entirely lack the economies of scales and synergies that Kering might target.”

Luxottica shares on Wednesday closed up 0.25 percent at 40.61 euros, or $53.29.

Luxottica just renewed its Chanel license, when Chanel could have potentially opted for a more exclusive and limited distribution, and there are no other big licenses expiring in the coming years. “The search for more exclusivity might be seen as the strongest reason behind the internationalization of eyewear manufacturing (it was the case for Armani back in 2002),” said the report. “From manufacturing to logistics, from consumer experience to health-care needs, from strong relationships with extensive networks of opticians to the exclusivity of fashion-luxury brands, we tend to believe that eyewear will remain a completely different business for most of the luxury brands in Luxottica’s portfolio.”

Not everyone agreed. “The trend is to bring exclusive brands in-house, and Kering’s move should prompt the industry to reflect on the issue,” said Gianluca Pacini, equity analyst of branded goods at Banca IMI. Reflecting on the Wednesday performance of Safilo’s shares, Pacini said, “The market carved out directly [from] Safilo’s top line the 250 million euros [$328 million] that derive from Gucci, reflecting it in the share price. Kering will pay Safilo 90 million euros [$118.1 million] as a compensation, but the market did not recognize this, as if it didn’t count at all. As a producer, Safilo will also pocket a small part of margins from Gucci starting from 2017, but Safilo was penalized by the uncertainties concerning what will happen after 2020. The market wants to be on the safe side, and, when in doubt, it considers lost what it cannot count on now. The news came out late last night and took everyone by surprise, so the market is still coming to terms with its implications.”

Bassel Choughari, equity research, luxury and branded goods analyst at HPC, said, “This was a highly unexpected move, and it was also a surprising decision coming from Kering. The eyewear business is not only about manufacturing or brand marketing; but it’s also about distribution — a very difficult entry barrier — and Kering doesn’t have it in place. Years ago, something similar happened when Giorgio Armani and [Luxottica chairman] Leonardo Del Vecchio split. The designer wanted to do eyewear on his own, and he tried, but then he went to Safilo.”

The changes at Safilo follow Luxottica’s management shuffle earlier this week. Rumors that the latter’s ceo, Andrea Guerra, was leaving after 10 years had been circulating for a few weeks, so the market had time to adjust to the idea, recovering after a 5 percent decrease on Aug. 20.

Industry observers all agree that an executive of Guerra’s reputation and expertise will have no trouble landing another top executive role, although he can afford to be choosy. Guerra, who has a two-year non-compete agreement, walks away from Luxottica with a redundancy incentive of 10 million euros, or $13.12 million, in addition to a severance pay that includes 592,294 euros, or $777,297, and a remuneration of 800,000 euros, or $1 million, as part of the settlement. Further, in an off-market transaction, Guerra will sell 813,500 Luxottica shares to Del Vecchio at a price of 41.50 euros, or $54.46, per share, for a total of more than 33.7 million euros, or $44.2 million.

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