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Valuation Talk at Dolce, Gabbana Trial

The analysis is related to the investigations that led to both designers being charged with tax evasion.

MILAN A hearing Wednesday in the ongoing tax trial of Domenico Dolce and Stefano Gabbana focused on numbers.

During a thorough and well-documented four-hour deposition illustrated by 111 pages of slide sheets and charts, Maurizio Dallocchio, corporate finance professor at Bocconi University and a former president of the Audit Committee of the European Investment Bank, who worked on the value of the Luna Rossa brand, among others, presented his conclusions as an outside consultant appointed by the designers and their lawyers. Dallocchio has worked on valuations of many brands, including Prada’s Luna Rossa.

On Wednesday he concentrated on the sale of the Dolce & Gabbana brands to Gado, analyzing the methodology employed by PricewaterhouseCoopers to evaluate them and the accusations by the Revenue Agency in June 2010 comparing the parameters used by each. He referred in particular to the sales figures and their relative growth rate; the fiscal rate, and the weighted average cost of capital, or WACC.

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The analysis is related to the investigations that led to both designers being charged with tax evasion related to the 2004 sale of the Dolce & Gabbana and D&G brands to the designers’ Luxembourg-based holding company, Gado Srl. The Italian tax police reportedly consider Gado essentially a legal entity used to avoid higher corporate taxes in Italy.

Based on a business plan for the 2004-07 period, calculations of growing royalties and the company’s latest revenues, PricewaterhouseCoopers pegged the value of the Dolce & Gabbana and D&G brands at 360 million euros, or $484.4 million at current exchange.

According to the tax police calculations, which took into account lower tax charges in Luxembourg, the value of the brands was estimated at 1.1 billion euros, or $1.4 billion.

 

The designers; general director Cristiana Ruella; accountant Luciano Patelli; Dolce’s brother Alfonso; finance director Giuseppe Minoni, and Antoine Noella are charged with omitted and unfaithful earnings declarations. The defendants have denied the charges.

“Wholesale sales should have been taken into account as this comprises sales generated by the brand, both by its licensee and sublicensees, and thus the sales that originate royalties,” said Dallocchio. “It is a mistake to incorporate retail sales in the estimates, as these do not originate royalties,” hence contesting the total of 1 billion euros the Revenue Agency calculated in 2004.

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Responding to questions by the designers’ lawyer, Armando Simbari, Dallocchio passed on to contest how the rate of sales growth, and implicitly of royalties, was determined. “This should be based on elements ex-ante, documented and that can be verified, in line with the company’s strategies and relative studies.”

 

He showed how it was “unsustainable” to prove a 20 percent growth in the long term, pegged at six years. “Not only would it be extraordinary but it is nonexistent, unless you are talking about a start-up — the Revenue Agency defined Dolce & Gabbana as a mature business — or you are privy to strategies about development in new areas, or new products,” he said. “In my studies, I’ve never seen such growth — 3 percent is considered very good. Calculating a 20 percent growth until 2030, imagine the magnitude of this, the company would reach sales of 116 billion euros [$152 billion].”

He drew comparisons to Internet companies such as Yahoo, Google and Facebook; growth rates projected by luxury association Altagamma; Italy’s Chamber of Fashion’s Fashion Economic Trends, and financial reports by Bulgari, Hermès and LVMH Moët Hennessy Louis Vuitton, “all below 10 percent” in the 2003-05 period, and he underscored the economic crisis in 2008 and 2009.

Dallocchio firmly highlighted the need to consider a tax rate in estimating the value of a brand, noting that the tax agency did not take it into account. “It would be understandable to choose the Italian tax rate or even the European tax rate, but I think it should be the average tax rate of the countries that are relevant in terms of business for the company,” he said.

The consultant went on to contest data he considered “inaccurate” from Interbrand, which valued the brands at 2.2 billion euros, or $2.8 billion, more than the enterprise value. He also disputed the numbers provided by the tax police, which he said employed a 2.2 percent tax rate in Luxembourg and an average European tax rate of 25.11 percent, which he said are “nonexistent,” pegging them at 4 percent and more than 31 percent, respectively. Also, Dallocchio said that the police “suggestion” was that taxes paid on royalties “enjoyed” the Luxembourg 4 percent tax rate, but noted that taxes on royalties received by Dolce and Gabbana through sublicenses and on the corresponding royalty quota paid to Gado were also paid in Italy.

Earlier in the morning, the defendants’ lawyer, Simbari, questioning Vittorio Faraggiana, a Milan-based consultant on intellectual property who has been working for more than 15 years with Dolce & Gabbana, aimed to prove that Gado was effectively an entity based in Luxembourg and that its employee Maria Grazia Bergomi, a witness earlier in the trial, was autonomous in protecting the brands. “Yes, she could decide on her own and had autonomy of spending as she needed to decide and act quickly,” said Faraggiana.

 

As other witnesses before him, he said the designers did not deal with the “technicalities connected to brand protection” and that he dealt with Bergomi exclusively and only rarely and briefly talked to Ruella. Faraggiana remarked that the move to Gado was lengthy as it involved the registrations of between 1,600 and 1,800 brands around the world.

“Each country has different regulations, and the variation of registrations took up to eight or nine months at least,” he said, adding that it was “necessary” for Gado to acquire control of the brands around the world. He underscored that Bergomi was based in Luxembourg, as he called her and sent documents there, and that Gado had become his studio’s client. After Bergomi, he dealt with Claudia Valentina Bertinetti, also a witness in the trial.

During a similar testimony, Anna Parazzini, who worked with Faraggiana, said that through the move to Luxembourg, Bergomi took the opportunity to streamline the registrations, “maintaining only those that were interesting.”