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Clash of the Titans

Finance and fashion are locked in a decades-long battle to keep Valentino in the black.

Fashion history is packed with tales of designers clashing with their corporate backers. Think Tom Ford, Jil Sander and Hedi Slimane, to name just a few.

Valentino’s first tangle with the financial world came in 1969, when he sold his company to Kenton Corp., the onetime owner of Cartier, Kenneth Jay Lane and furriers Ben Kahn and Georges Kaplan.

That deal marked the first chapter of what would become a novella of Valentino’s corporate history, as ownership of the fashion house reverted back to the designer and Giancarlo Giammetti, then on to Holding di Partecipazioni Industriali and subsequently the Marzotto family. And the story is far from finished: Just this month, Italian investment fund Permira bought control of the house’s parent company, Valentino Fashion Group, initiating a whole new era.

In the fall of 1969, Kenton agreed to buy the house of Valentino, its couture operations and its three boutiques in Rome, Milan and Paris, for $4 million. Earlier that year, Beck Industries, a rival conglomerate, had struck a preliminary deal to buy the house, but negotiations eventually deteriorated.

“[Kenton] in New York offered to buy Valentino. I remember that I was in Southampton, so it must have been a weekend, and we signed the deal that Wednesday,” Giammetti recalled. “At that time [the price] wasn’t bad for a small company belonging to two young men. I wasn’t even 30.”

The designer, then 37, was just as enthusiastic at the press conference unveiling the deal. “This turn of events makes me very happy. The Kenton Corp., with its existing family of houses with world renown in fashion, is the most logical association for us to make, and we are extremely pleased,” Valentino told journalists assembled at the 21 Club. “I expect that my new relationship will greatly enhance our firm’s future position and potential.”

But the lovefest didn’t last long. In summer 1973, a nasty legal battle ignited between Valentino and Giammetti and Kenton over Kenton’s failure to pay for part of the business and each party’s right to the Valentino trademark. In January 1974, Kenton filed for Chapter 11.

“Kenton had a good idea. I thought we couldn’t make a better arrangement. They had Cartier, Mark Cross, Ben Kahn, all fine names, I didn’t realize they didn’t have the financial base for it,” Giammetti told WWD in May 1974. “The biggest problem with them was turnover at the top. I never knew who I was reporting to.”

In October 1974, a bankruptcy judge approved a settlement between Kenton and Valentino, a complex pact that saw control of the Valentino business revert back to the designer and Giammetti. As part of the deal, the court waived Kenton’s $1.3 million in final payment for the fashion house.

Giammetti said he and Valentino did well in the settlement since they got to keep Kenton’s initial down payments, which totaled $2.7 million. They were pleased to strike such a lucrative financial deal so early in their careers.

Through the late Seventies, Eighties and early Nineties, Giammetti and Valentino managed the business on their own. As they grew the ready-to-wear and couture businesses, they also constructed a vast web of licenses covering everything from the diffusion lines Oliver and Miss V to more mundane items. (One source even recalled a license for toilet paper in Japan). These deals generated lucrative royalty income for the pair and subsidized their increasingly opulent lifestyles. In April 1989, Valentino was on track to post annual sales of $70.4 million, of which $41.5 million, or about 59 percent, came from licensing royalties.

“Our ultimate goal is to take this company from a fashion house — a one-man show — and turn it into a diversified international corporation,” Giammetti, then Valentino’s chief executive, told WWD in 1989. In that interview, he also floated the idea of selling a minority stake in the company to Cartier, a deal that never occurred.

Valentino’s next big deal materialized in 1998, when he and Giammetti sold the company to the now-defunct conglomerate Holding di Partecipazioni Industriali SpA for about $300 million, a sum many thought staggering at the time. The designer was moved to tears at a press conference announcing the deal.

HdP, once a large conglomerate with varied holdings in media and fashion, was well acquainted with Valentino. The group already owned Turin, Italy-based GFT, which had been manufacturing Valentino’s apparel through a licensing agreement dating back to 1979. Eager to become a multibrand powerhouse in the fashion industry, HdP embarked on an acquisition drive that never materialized beyond Valentino and Joseph Abboud.

Indeed, Valentino’s tenure under HdP is widely considered one of the least successful by-products of fashion’s M&A boom in the late Nineties. Financial losses and management clashes with the designer and Giammetti were the dominant themes of the HdP era.

Valentino’s revenue declined drastically as HdP implemented a Gucci Group-esque model, slashing the brand’s myriad licenses without successfully establishing new businesses to take their place, said a source familiar with the situation. Another former executive lamented that the designer and Giammetti blocked most attempts to broaden and diversify the design team with younger members.

That said, Fabio Giombini, who was first general manager and later ceo of Valentino from 1999 to 2002, stressed the problems under HdP were often exaggerated in press and fashion circles and that the company was closer to breaking even than most people imagined. He said the brand developed considerably under HdP in terms of organization, distribution and the launch of an accessories collection.

“There was a restyling of the Valentino brand, giving it a more modern image,” Giombini said.

But HdP’s fashion headache intensified when GFT began losing its licenses. The biggest blow came in 2000 when Armani parted ways with the company, ending a crucial revenue stream for GFT.

Giammetti said that not long after HdP acquired the fashion house, he and Valentino realized the Italian company wasn’t interested in fashion and wanted to concentrate on its publishing assets. He recalled sitting through six-and-a-half-hour board meetings, discussing matters like the cost of paper and staffing at various publications and not dealing with topics pertaining to Valentino and GFT.

“[HdP executives] started to say that fashion wasn’t going well and they were asking themselves why they had spent so much. Little by little I heard how disenchanted they had become,” he said.

As a result, HdP started shopping Valentino around. A series of potential buyers emerged, including Gucci Group and Bulgari’s Opera fund. In 2001, Giammetti and Valentino denied speculation they were holding their own meetings with financial backers to buy back the company they founded.

Then in 2002, fashion and textile group Marzotto SpA bought Valentino for $210 million, a sum including the assumption of $179.2 million in debt. Considerably lower than the $300 million HdP paid for the business, the price deteriorated amid the luxury industry’s post-9/11 slump.

Giombini recalled that Valentino and Giammetti were nervous about the impending shift in ownership since the fate of a marginalized Yves Saint Laurent at Gucci Group was still fresh in their minds.

“They feared that it would be a situation like YSL,” Giombini said.

But once more, the pair managed to hold on to their creative control and pocket another set of lucrative contracts with Marzotto.

The new owner quickly got Valentino back on the growth path, thanks in part to a series of licensing agreements, most notably a pact with SINV for a new, younger line, Valentino R.E.D., and a beauty deal with Procter & Gamble Co. Valentino broke even in 2004.

Marzotto managed to capitalize on the allure of the Valentino brand as it spun off all of its fashion interests into a new company called Valentino Fashion Group SpA. The company was listed on the Milan stock exchange in July 2005.

Ironically, the Valentino fashion house is one of VFG’s smaller assets. Last year, Valentino’s sales were 239.5 million euros, just over 12 percent of VFG’s 1.96 billion euro consolidated turnover. A controlling stake in Hugo Boss makes up the bulk of VFG’s volume.

But just one year after VFG’s highly touted stock market debut, questions about the future of the company began to surface. Rumors began circulating the company was on the block. Also, Michele Norsa, a long-standing Marzotto executive who was Valentino’s ceo, resigned in July 2006 to join Salvatore Ferragamo SpA.

Meanwhile, sources close to VFG reported rising tensions between chairman Antonio Favrin and the Marzotto family.

The standoff culminated in late May, when two private equity funds launched competing bids for VFG. Favrin turned to U.S.-based Carlyle Group in an effort to edge out the Marzottos, while the family worked with rival fund Permira to return the favor, said Italian sources.

Giammetti declined to say much about the Marzotto saga. “It’s clear now that it proved to be a company that wasn’t looking at things in the long term. Let’s forget about it,” he said, at the same time criticizing the Marzottos for not investing enough in the brand.

The Marzottos declined to be interviewed for this story.

Ultimately, Permira won the battle by buying up a 53.6 percent controlling stake in VFG from the Marzotto family. The fund is now preparing to launch a full-fledged bid for the company. Favrin still hasn’t stated whether he intends to tender his shares, and his future at the company is uncertain at best.

Favrin is just one of many lingering questions regarding the future of Valentino and its parent VFG. Permira has yet to outline a strategy for the company in terms of business or creative direction, for example, and still has to see if it can buy control of all of VFG. If it does so, the deal would cost Permira a total of $3.5 billion.