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M&A Activity Soars in Jewelry, Fashion

Dealmakers expect a stronger, more varied flow of transactions this year as Europe’s main luxury players hunt for new growth avenues.

TowerBrook Capital took a majority stake in denim and lifestyle brand Kaporal.

PARIS — It’s a red-carpet moment for mergers and acquisitions.

This story first appeared in the May 28, 2013 issue of WWD.  Subscribe Today.

Jewelry and designer ready-to-wear — product categories synonymous with Hollywood celebrities — are entering the spotlight for dealmakers, who expect a stronger, more varied flow of transactions this year as Europe’s main luxury players hunt for new growth avenues.

“Leather goods and cosmetics remain high on the list, but the new hot category is jewelry,” said Ariel Ohana, managing partner at Ohana & Co., a boutique investment firm in Paris. “And apparel-couture, which was long deserted by groups in their acquisition hunts, is receiving more interest recently.”

Echoing other observers, Ohana predicted a healthy number of transactions in 2013, including more in jewelry to dovetail with Kering’s purchase of Italy’s Pomellato for an estimated $360 million last month and its takeover of Chinese fine jeweler Qeelin in December. Others also have snapped up jewelry brands: In March, Clessidra acquired an 80 percent stake in Buccellati for about $103 million, while Gemfields bought Fabergé in November.

On the fashion front, Kering acquired a majority of London designer Christopher Kane in January; OTB, formerly Only the Brave, acquired a majority of Marni in December, and the Qatari fund Mayhoola for Investments bought Valentino Fashion Group for $858 million in December.

Ohana noted he expects most transactions this year to be in the $50 million to $300 million range.

“There is a definite pickup in M&A activity versus last year,” agreed Pierre Mallevays, managing partner of Savigny Partners, a London-based boutique investment bank specializing in luxury goods. “There hasn’t been so much fluidity and open-mindedness in a long time. We will see a lot of variety in investment types and sizes.”

Last week alone saw two more deals in Europe.

TowerBrook Capital Partners acquired a majority stake in the French lifestyle brand Kaporal, while in the men’s arena, French digital group MenInvest said it has acquired edgy London-based men’s online retailer Oki-ni.

Mallevays pointed out that “everyone seems fascinated by the development success of the contemporary category,” alluding to such fast-growing brands as Acne, Rag & Bone and Isabel Marant, along with chains such as Sandro and Maje, which last month, along with Claudie Pierlot, was sold to American private equity giant Kohlberg Kravis Roberts & Co. in a deal estimated to be worth about 650 million euros, or $859 million at current exchange.

According to market sources, Kering has looked at a number of contemporary players to learn more about the segment, including Maiyet, an upstart luxury label that promotes craftsmanship in areas of economic and political conflict, like Colombia or India.

Mallevays cautioned that the number of targets in the contemporary segment is “very shallow as few of these brands are open to do a transaction.”

Not so for many independent, midsize players in jewelry, fashion and a host of other categories.

These companies face stagnant growth in historical luxury markets and increasingly daunting entry barriers in fast-growing emerging ones, according to Ohana. This is particularly the case regarding China, where real estate is becoming expensive, with big groups cornering all the best deals and spaces.

“So it is a typical opportunity-threat situation,” he explained. “It’s a good time to sell, but if you don’t sell you will need to invest much more cash and are at risk.”

Mallevays agreed that “owners of smaller firms realize that on their own, it is very difficult to capture opportunities in emerging markets, where all the action is likely to be in the foreseeable future. So there is renewed interest for the two sides to talk.”

On the other side of the negotiating table are groups that have accumulated bulging cash piles in recent years. LVMH Moët Hennessy Louis Vuitton had cash and cash equivalents of 2.19 billion euros, or $2.82 billion, as of Dec. 31, while Richemont had a net cash position of 3.21 billion euros, or $4.13 billion, as of March 31.

According to Thomas Chauvet, luxury analyst at Citi, returning capital to shareholders seems an unlikely path.

“Increasing the payout ratio or distributing special dividends might not be the most tax-effective way for private European family owners to pay themselves,” he explained. “Similarly, some luxury executives do not believe in the benefit of share buybacks.”

That’s why luxury players are likely to pursue what he called selective and complementary acquisitions.

“They will look for categories where they are underpenetrated to acquire scale and to rebalance their portfolios. This is the way we understand the recent moves into jewelry by soft luxury conglomerates: LVMH Moët Hennessy Louis Vuitton with Bulgari and PPR, or Kering, with Pomellato. Or similarly, the move into high-end jewelry by Swatch Group, whose core business is watches, with the acquisition of Harry Winston earlier this year,” Chauvet said, referring to the January megadeal with an enterprise value of up to $1 billion.

The analyst also predicted luxury groups would continue to hoard cash for rainier days.

“Let’s not forget that the luxury industry has gone through two major downturns in the last decade,” he said, referring to the 2008-09 financial crisis and the sharp downturn in the wake of the 2001 terrorist attacks in New York, which was exacerbated by a SARS outbreak.

Investment experts agreed that Europe’s big conglomerates are likely to be the major actors on the buy side. Besides acquiring brands, they are likely to continue quietly snapping up suppliers, and make select investments in real estate as rental prices in top locations soar.

Chauvet said “tactical acquisitions” of suppliers of watch components and tanneries specializing in precious leather are part of a broader industry trend toward more vertical integration. “It is key for many groups to secure long-term visibility over sourcing, enhance product quality and preserve jobs at home,” he said.

According to one Paris-based analyst, who requested anonymity, “Kering is more likely to keep adding smaller brands and know-how; LVMH is more likely to keep integrating upstream with raw materials and sourcing, and downstream with new retail concepts such as Samaritaine, while Richemont is more likely to keep investing on production and to remain cautious on external growth.”

Indeed, while discussing Richemont’s full-year results last week, Johann Rupert, the company’s chairman and controlling shareholder, downplayed the likelihood of acquisitions, citing a dearth of sizable targets “that are either affordable — or for sale,” and a conviction that the group can yield higher returns by investing in its own properties.

“A year or two ago we had to make a decision — do we invest more in Cartier, Van Cleef, Piaget — in terms of jewelry — or do we go and buy something?” he said. “We think there is a lot, lot more scope in Piaget. It’s done brilliantly in watches, but I’d rather have Piaget expanding in jewelry than buy another jewelry company.”

Observers agreed that positive near-term prospects for luxury, while dimmer than the boom years of 2011 and 2012, underscore a lively M&A scene.

“The key driver to M&A in any sector is confidence,” said Ohana. “Long term, we have confidence in the luxury space because of the consumer’s quest for quality and the quest for status….I don’t see anything that will stop that.”

Valuations in luxury remain high because of consistent growth and strong margins that are resilient to erosion, Ohana noted.

Mallevays agreed endemic players are likely to drive a lively M&A scene.

“Groups will continue to be the most able to execute and deliver a business plan after an acquisition; they will drive activity and pricing,” he said.

Not that he expects other potential buyers to sit on the sidelines.

Mallevays predicted private equity firms will look at large targets in the lower end of the luxury spectrum, and independent investors will get involved in revivals and early stage deals.