Possible Sale of Cavalli Hangs in Balance

Is Roberto Cavalli really going to sell a stake in his business to private equity?

MILAN — Is Roberto Cavalli really going to sell a stake in his business to private equity?

This story first appeared in the May 5, 2008 issue of WWD.  Subscribe Today.

According to sources, the answer will likely arrive before the summer, with the deadline for suitors to submit bids for the Italian fashion house slated for mid-May.

“People are waiting to see what Cavalli wants to do,” a person close to the deal told WWD on condition of anonymity.

Merrill Lynch, which is advising on the sale, distributed a formal memorandum to interested parties in April, valuing the company at 1.4 billion euros, or nearly $2.2 billion at current exchange — 14 times Cavalli’s projected earnings before interest, taxes, depreciation and amortization for 2008, sources said.

Cavalli has not released official results for 2007, although EBITDA for the year is believed to be around 86 million euros, or $118 million at average exchange, on revenues of 238 million euros, or $326.2 million.

WWD understands that, of some 15 private equity houses contacted, Apax Partners, Blackstone Group Holdings, Candover, The Carlyle Group and Cinven are preparing bids.

Of these, only Carlyle has confirmed its interest. The others and Cavalli declined to comment.

Permira, which acquired the Valentino Fashion Group last year, is also said to be in the mix, although Gianluca Andena, co-chief executive officer of Permira in Italy, told Italian financial daily Il Sole 24 Ore in March any such deal “could be premature.”

A person familiar with the matter raised further doubts about Permira’s interest, telling WWD, “Even if Cavalli is a fantastic company, it would be difficult [for Permira] to manage [VFG and Cavalli], and designers are often egocentric.”

Permira declined to comment on the speculation.

Cavalli has spoken for 18 months of possibly selling a stake in the company he set up more than 40 years ago in order to fund the next phase of growth. His profile has risen higher and higher over the last few years as the designer has expanded his distribution, opened more stores and, in 2007, linked up with H&M for a one-off collection that created mania from Manhattan to Tokyo.

According to sources, the asking price is likely to be the sticking point for any prospective deal, with Cavalli originally having slapped a figure of 2 billion euros, or $3.12 billion at current exchange, on his business.

Indeed, Cavalli, who is understood to want to retain a majority holding, has already rejected a couple of offers valuing the business at around half that number, sources said.

In 2006, Saudi Arabian private equity fund SAB Capital submitted a bid for 60 percent of the fashion label, but an agreement was never reached.

However, with the current credit crisis undermining private equity firms’ abilities to finance large deals at attractive rates, Cavalli could find it difficult to get what he wants.

“There is very little propensity [at the moment] to risky investments from financial institutions providing the credit part of these deals,” said Claudia D’Arpizio, a partner in the luxury goods practice of consulting firm Bain & Co., referring to private equity activity in general.

“But I still see a lot of private equity interest in [the luxury goods] sector because it is still one of the most attractive in terms of market growth and profitability….[Private equity companies] feel they can do a turnaround and increase value in this sector,” D’Arpizio told WWD.

Bain expects the luxury market to grow 7 percent in real terms this year and 1 to 2 percent in nominal terms because of the strong euro.

With bids for Cavalli expected to be conservative due to the lack of cheap financing, sources said companies would likely make offers that look good on paper while structuring the deals to require less cash. They could also seek majority control.

Sources also speculated whether the flamboyant Cavalli would be able to work with a private equity company. At least one potential bidder is evaluating whether to oust Cavalli should any deal go through, a person involved said.

A similar move is believed to have been behind Valentino’s retirement from his label earlier this year, with his services rumored to be surplus to Permira’s requirements post-acquisition. Alessandra Facchinetti has since taken the creative reins.

However, D’Arpizio said private equity companies and fashion entrepreneurs could and should work together, where possible.

“[Designers] need to find the right chemistry with the new eventual ownership. But I also think the private equity firms need to understand….There are many areas where they can bring value and there are some areas where they need to trust the creative people, the entrepreneurs. [Private equity investors] need to work together [with designers] to supplement where there is a lack of professional competency without touching the product, the creativity or the areas where the current entrepreneurs, and in particular the designers or creative people, are strong,” she said.

D’Arpizio added the industry dynamics were difficult to manage, but that if savvy private equity operators could bring in the right management team, “they can really add value to the companies.

“When companies grow, there is value for everyone,” D’Arpizio said.

Cavalli is said not to be eager to sell, but does have management issues.

The question, it would seem, therefore, is, as one source put it, “Is Roberto Cavalli willing to take a lower price than he expects if he sees the right management in front of him?”