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Many IPOs on Hold in Rocky Financial Times

Initial public offering, anyone? Anyone?

MILAN — Initial public offering, anyone? Anyone?

This story first appeared in the June 16, 2008 issue of WWD.  Subscribe Today.

With Tommy Hilfiger shelving its plans, Prada and the Neiman Marcus Group in no hurry and Salvatore Ferragamo still working on it, it would appear now is not the most fashionable time to launch an IPO — and with the financial markets weathering a beating, unsurprisingly so.

Hilfiger Group said in April it would reconsider listing at the end of 2009, after private equity owner Apax Partners postponed the fashion company’s IPO on the eve of its road show in January because of volatile market conditions.

Around the same time Prada SpA chief executive officer Patrizio Bertelli said his company would definitely go public at some point but was in no rush and ruled out courting investors before the summer, confirming a WWD report on April 14.

And in March, Salvatore Ferragamo SpA said it would decide before May whether to go ahead with its plans for a listing this year. No announcement was made, time has run out for a summer placement and Leonardo Ferragamo said last week that the company “was still working on it,” suggesting Ferragamo is in no hurry either.

Such hesitancy is not particular to the fashion industry. According to a study by accountancy firm Ernst & Young, global IPO activity decelerated sharply in the first quarter of the year — with 83 companies withdrawing their IPOs and 24 companies postponing their listings due to the credit crunch and sustained financial turmoil.

Ernst & Young expects IPO activity to pick up once market conditions brighten.

Claudia D’Arpizio, a partner in the luxury goods practice of consulting firm Bain & Co., told WWD she expected Italian fashion companies, which were preparing to list, to hold off from doing so for “some months.”

“But I don’t think this will mean they will give up their strategy of going public because it is not a decision they need to take with a short-term view of selling part of the company at the highest price,” she said.

D’Arpizio explained that, while market conditions could affect the timing, the key reason some luxury goods companies would eventually float was that they needed to invest in their businesses to safeguard future growth in an increasingly complex and competitive industry.

There was also the question of succession planning.

“Many Italian and European companies…need really to change their pace from family-owned, first-generation entrepreneurial organizations into something more managerial,” D’Arpizio said.

Prada, in particular, has been conspicuous in this respect. The 95-year-old company, which is 95 percent owned by the Prada family, bolstered its management ranks last year, tapping former Gucci Group and Burberry executive Brian Blake for the newly created role of chief operating officer, poaching Valentino executive Graziano de Boni as president and chief operating officer of its U.S. business and appointing former banker and Prada adviser Carlo Mazzi as executive vice president.

Prada could now wait until November, the second of two months it has touted as possible windows for an IPO this year — the first was June — although any decision will be subject to market conditions.

Bertelli said in April it was very much a matter of picking the right moment. According to sources, he is concerned about the economic climate, following lower-than-expected sales so far this year, meaning Prada’s stock market dance could carry on for a ninth year.

D’Arpizio said the luxury market as a whole was holding up well, despite the slowdown in consumer spending in the U.S. and Europe, due to growth in emerging markets like Asia, India, Latin America and Eastern Europe.

“The [first-quarter] results of many luxury players are positive in growth in real terms,” she said. “Different [parts of the world] are never impacted at the same time and in the same way in an economic downturn, so there is always a buffer of growth.”

D’Arpizio said luxury consumption in the U.S. had taken a hit in the first quarter and forecast further deceleration “for the next three months,” mainly due to department stores marking down stock early to protect profits. However, she added, luxury players were performing well or acceptably in their own stores.

“For sure, 2008 will be difficult in the U.S., but not a tragedy,” D’Arpizio said.

Elsewhere in the world, she said there were signs of a recovery in Japan, where department stores reported improved results again for March and that Europe was a mixed bag. Eastern Europe and Russia were growing very quickly while Italy, France and the U.K. would suffer, but only in areas less dependent on tourism.

“There will be more impact in the second-tier locations, which are more linked to local consumption,” D’Arpizio said.

She added Germany seemed to have completely recovered from a slowdown in consumer spending and since mid-2007 was performing well and growing fast.

This year, Bain has forecast worldwide growth in the luxury sector of 7 percent in real terms and 1 to 2 percent in nominal terms due to currency fluctuations.

“The big impact is again the currency effect of the dollar still losing weight vis-à-vis the euro and this is eroding growth and profitability,” D’Arpizio said.

This, she said, was the underlying reason why many listed companies and recent IPOs had not performed as well as anticipated.

Italian luxury stocks have lost between roughly 20 and 60 percent of their value in the last six months. Fashion group Aeffe SpA and jeweler Damiani SpA both made their debuts last year on the Milan Stock Exchange STAR segment for small companies and are trading at around half their launch prices.

However, D’Arpizio concluded, there were lessons to be learned from the last crisis in 2001, when brands like LVMH Moët Hennessy Louis Vuitton, Gucci and Bulgari took advantage of a negative situation to create differentiation.

“They created a strong relationship with their consumers and a competitive advantage that was there for the coming years,” she said.

“In periods when the market is not flamboyant, there is the opportunity for diversifying your approach and really creating a relationship with your consumers and delivering a superior proposition. This can be the difference.”