By and  on July 11, 2007

Already a mouthful in English, Proenza Schouler should now be pronounced with an Italian accent.

Having just wrapped up momentous festivities in Rome for the 45th anniversary of its flagship brand, Valentino Fashion Group SpA has taken a 45 percent stake in the fashion label by Jack McCollough and Lazaro Hernandez, WWD has learned.

Stefano Sassi, Valentino Fashion Group's chief executive officer, will become chairman of Proenza Schouler, and Shirley Cook will continue to serve as the label's ceo.

"We're happy we now have a security net for our company, which we never had before," Hernandez said in an exclusive interview. "The business has been growing exponentially, and to do that you need the proper funding."

And it goes beyond the cash injection, McCollough added. "It's also having a strategic partner who can really get involved in terms of the factories, to be able to help with timely deliveries, and with distribution networks — all things the Valentino Fashion Group has a lot of strength in," he said.

Through its U.S. subsidiary, VFG spent $3.7 million for the stake, with the capital increase expected to drive "very significant and sharp" growth for the five-year-old firm, Sassi said.

"These two young guys are very fresh and outstanding.…I think they have a great potential to grow," Sassi said. "They have the talent, and we can provide them the financial resources that are required to develop the business. It's the perfect marriage."

McCollough and Hernandez first met Sassi and Matteo Marzotto, president of Valentino SpA, at Première Vision last February and were subsequently invited to join the executives for dinner at Marzotto's Paris home — a casual evening that triggered the talks. Sassi noted that negotiations with Proenza Schouler preceded the takeover offer by European private equity group Permira Holdings, which last month secured a majority stake of VFG through a series of deals with members of the Marzotto family, the previous owners.

Sassi said VFG's new shareholders "agreed on this kind of operation," noting the addition of Proenza Schouler would bring prestige and future growth potential.

"Valentino Fashion Group wants to be a leader in the fashion sector," Sassi said. "People like Lazaro and Jack, despite the fact that their business is not yet big, can bring something significant in terms of image."Since launching with a label based on their mother's maiden names in 2002 at age 23, the duo has developed one of the hottest names on the New York scene, winning acclaim for sleek and intricate designs that nimbly straddle the tough-chic divide. They have been nominated for the Council of Fashion Designers of America's Womenswear Designer of the Year award twice, and won it last month in a tie with Oscar de la Renta. They also received the CFDA/Perry Ellis award for emerging talent in 2003, and were the first recipients of the CFDA/Vogue Fashion Fund in 2004, taking home a cash prize of $200,000.

Their successful, short-term collaboration with Target's Go International initiative last February put them on the map nationwide. The launch came with an aggressive marketing push, including a TV commercial that brought their image into households they wouldn't otherwise have reached with their designer collection.

With so much attention, it's not surprising Proenza Schouler attracted several potential suitors. In the last year, McCollough and Hernandez bought out their backer, Markus Hofels. Sources said LVMH Moët Hennessy Louis Vuitton and Samsonite also recently held talks with Proenza Schouler about investing in the business, among others.

"Throughout our career, we have had a lot of people knocking at the door," Hernandez said. "We never found a partner that felt right. We are very much instinctual people and we go with our gut. A lot of people who approached us haven't necessarily been experts on the luxury market per se. We were waiting for someone who had a similar vision to what we had, and experience in developing a brand.

"[VFG] is a small conglomerate, there is a personalization within that organization that feels very intimate and right for us," he added.

Sassi stressed that talks with Proenza Schouler were always centered on investing in the brand and "were not linked to" taking on design duties at Valentino, which had been the subject of endless succession rumors ahead of the anniversary blowout. The founding couturier, 75, is said to be zeroing in on a new three-year contract with Permira. Sassi declined comment on Valentino, steering the discussion toward the Proenza Schouler designers."They have very clear ideas about how and what they want to do with the brand…and they are very committed to have a success story with their own brand," Sassi said. "We will work as a support because of the experience we have with critical mass."

In addition to Valentino SpA, VFG owns a majority stake in Hugo Boss AG and men's wear brand Lebole, and holds licensing deals for M Missoni and Marlboro Classics.

Sassi said the transaction would not herald any significant changes in the Proenza Schouler business, which he said is "quite developed" in the U.S. and with strong management under Cook.

The collection is sold in 80 doors worldwide, including retailers such as Barneys New York, Bergdorf Goodman, Colette in Paris and Harvey Nichols in London. On average, retail prices range from about $850 for knits to $950 for tops, $1,200 for jackets, $2,000 for coats and $2,200 for dresses.

Proenza Schouler just kicked off its first resort delivery and inked an eyewear deal with L'amy for a September launch.

Market sources estimate the company's wholesale volume exceeds $6 million, with retail sales of ready-to-wear, footwear and other licensed products approaching $25 million.

The company is losing money, but is on track to break even in about two to three years, Sassi said.

Sassi said VFG's global expertise in distribution and logistics would help the firm expand its footprint in leather goods and extend its reach in new markets, particularly Europe and Asia. VFG can also help Proenza Schouler improve its deliveries, customer service and other basic business functions.

"The synergy is really the main thing," McCollough said. "They have their own factories, and fabric mill leverage. Being the small company that we are, it's hard to get a lot of leverage with the mills. Hopefully, we will now be able to get earlier deliveries, and the earlier the clothes are in the stores, the better chance you have of selling."

Hernandez added: "They have experience in developing fashion brands and luxury brands at the level we want to be at. At the same time, they don't have an army of brands that compete against each other, so they have the experience, but the vacancy for a brand like ours. It's that mixture that appealed to us."Proenza Schouler will continue to be based in New York, and the duo expects to be bolstering its design and sales team. They currently employ a staff of 13.

The designers also plan to open a sales office in Paris and a production office in Italy.

As for the duo's aspirations, they pointed to their upcoming eyewear launch, and a real push into handbags and shoes thereafter, followed by freestanding stores, and, one day, fragrance and even men's wear.

"As of now, we are primarily focused on the luxury end of women's," McCollough said.

For Permira, the deal is a small one. Founded in 1985, the company has raised funds worth approximately 22 billion euros, or $29.7 billion at current exchange, doing some 180 transactions in such diverse sectors as chemicals, technology, media, telecoms and industrial products and services. Investments in consumer products have ranged from British fashion retailer New Look and Italian tiles maker Marazzi Group to German lens and frames maker Rodenstock.

Last week, Permira said its takeover vehicle, Red & Black Lux Srl, struck a deal to buy 18.95 percent of VFG from Canova Partecipazioni SrL, a group of financial investors that includes VFG chairman Antonio Favrin. The Canova deal, pending antitrust approval, would lift Permira's total VFG stake to 60.2 percent.

Permira is looking to buy out minority shareholders and de­list VFG from the Milan Stock Exchange. It is offering all VFG shareholders 35 euros a share ($47.41 at current exchange), the same price Permira paid for the stakes owned by the Marzotto family and Canova.

The Red & Black tender offer could start as early as the last week of July and run through the first week of September. Red & Black will also launch a cascading bid for all outstanding shares in Hugo Boss AG. VFG owns 50.9 percent of Hugo Boss, which is listed on the Frankfurt Stock Exchange.

Asked if he would entertain more acquisitions, Sassi said it would depend on opportunities, but that anything that "can enhance Valentino Fashion Group's leadership is very welcome and will be entertained seriously."

The Proenza acquisition marks the establishment of "a sort of incubator of emerging, outstanding talent," Sassi said. "This is part of the activity of a group like ours. Permira as well agrees on this kind of strategy."

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