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Gauging the Interest in Sander, Lang

Prada Group may be ready to cast off its Jil Sander and Helmut Lang brands, but industry experts question whether anyone wants them.

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Prada Group may be ready to cast off its Jil Sander and Helmut Lang brands, but will anyone else want them? Analysts, investors and retailers say the two brands — once coveted by luxury goods groups in the late Nineties — are no longer as successful as they once were and could be a hard sell in today’s marketplace.

The debate over the future of the two labels comes as Prada chief Patrizio Bertelli has revealed yet another postponement of the group’s initial public offering. It marks the fourth time the Italian luxury goods company has delayed an IPO, raising questions as to whether Prada will ever go public.

Bertelli appears to have renegotiated a deal with the banks to cover the 700 million euros, or $929.6 million, in bonds due next June, thus eliminating imminent pressure to go to market. One source noted that Prada has the paperwork done and is ready for an IPO, but it’s just a matter of Bertelli’s personal whims and fears about running a public company.

Prada officials declined to comment for this article.

Although observers in the financial and fashion worlds may have grown weary of Prada’s on-again, off-again IPO flirtation dance — which has gone on almost to the point of farce — some observers said they don’t think this fourth postponement has seriously eroded the company’s credibility with the market.

“The market is opportunistic. If Prada comes up with a good offer, the market is going to listen,” said Chiara Tirloni, a Milan-based analyst with UBS Warburg.

Others weren’t so confident. According to Gilbert Harrison, chairman of investment bank Financo Inc., the delay could be a cause for concern. “It raises a red flag. If market conditions are not favorable, then it makes sense to delay an IPO. But because the luxury market is so hot at the present time, one wonders if there’s a problem or inconsistency in its earnings. If that’s the case, then you want to know how the company will correct it.”

As for Sander and Lang, it’s been five years since Prada proudly snatched up the two labels in a bid to become a multibrand powerhouse. Prada promised to expand both companies and leverage their ultracool, niche appeal with new stores and product lines. But it hasn’t been an easy path. Almost immediately, Prada found itself wrestling with designers’ personalities — Sander quit the company that bears her name twice in four years, most recently a few weeks ago. Although Lang has stayed on board, many fashion insiders say the business isn’t going well and the sales figures don’t contradict that theory. Analysts agree that both businesses are potential liabilities with regard to a future IPO since their losses weigh on Prada’s valuation.

But observers believe there is no dearth of potential buyers for Lang and Sander — even at prices that some financial players believe could go as high as $300 million for Sander, although considerably less for Lang. Private equity firms are flush with cash on both sides of the Atlantic and have been eyeing fashion and retail as prime investment opportunities. Still, sources at some funds said they have yet to hear from Prada, evidence the company hasn’t started shopping Sander and Lang just yet. Another source close to Prada noted that the logic on these brands has shifted suddenly — the company line up until a few weeks ago was to keep both brands.

While private equity groups may be game, it does not appear likely that the big luxury groups — which are wrestling with their own internal problems — would be lining up to buy either label. Europe’s multibrand titans such as Gucci Group parent Pinault-Printemps-Redoute SA and LVMH Moët Hennessy Louis Vuitton don’t appear to be likely buyers since both are restructuring their own money-losing acquisitions.

“The break-even point for companies has risen over the past 5 to 10 years because costs have gone up in nearly every sector of the business from human resources to advertising to retail,” said Andrea Ciccoli, vice president of the consulting firm Bain & Co. in Milan. “On top of that, it’s a crowded field nowadays. The market cannot sustain 10 more luxury brands,” he said.

By contrast, Richard Kestenbaum, an investment banker at Triangle Capital, believes it is an ideal time to sell a luxury brand. “There has never been a better time, because the merger and acquisition market is active right now, and there’s a lot of focus on the apparel industry, which is getting higher valuations,” he said.

Kestenbaum said the perception of the apparel industry has changed for the better as investors believe there’s now a certain level of professionalism — on an operational level — at fashion companies.

As for valuations, marquee fashion names typically fetch premium prices. “Any time you see a marquee name, you can bet that the seller is expecting a premium because of its scarcity on the market at any given time,” the banker said.

The question is at what price will an investor take on two prestigious, but loss-making, companies — one of them having lost its founding designer? Prada paid a reported $108 million for just over half of Jil Sander in 1999. That would mean the entire company was worth about $207 million at that time, a value that has likely deteriorated over the years as its losses accumulated and debts increased. Sander’s sales for the six months ended June 30 rose 4 percent to 65.4 million euros, or $80.5 million at current exchange, and the company expects a further increase in the second part of the year.

Cost-cutting helped Jil Sander narrow its losses before extraordinary operations to 17 million euros, or $20.9 million, from 20 million euros, or $24.6 million, the year before.

One banking source estimated that a final valuation for Sander could be as high as 170 to 230 million euros, or $225.8 million to $305.4 million, although other observers believed that was too much. A Prada spokesman declined to comment on the accuracy of those figures.

“[Jil Sander and Helmut Lang] could fetch one times revenue, but it’s hard to tell without really looking at their profitability levels,” said one New York-based private capital investment banker. He said luxury brands are trading at anywhere from two to three times sales and from 10 to 18 times pre-tax earnings. “But that’s for much larger companies,” he said. “So it would be difficult to put a price tag on Jil Sander or Helmut Lang.”

However, the investor said if Prada shops the brands around, an investor may be attracted to them because of their potential in the market. “Investors may look at what can be done with those brands, of how they can grow,” he said.

Some sources said that selling the Jil Sander business back to Sander herself would make the most sense, though it’s still unclear whether the designer has the means or the energy to reenter fashion yet again. Lang could make sense for a private equity fund but, like Sander, the company is posting losses, so it’s unlikely to go for a premium price. As one source put it: “We are in a buyers’ market.”

“Jil Sander still has a great franchise, but so much of the brand equity is tied to her persona,” said one London-based investor. “The ideal structure for the company now is Jil Sander with a private equity group behind her — and maybe a flotation in the future.”

Some industry sources say Sander, who is in her mid-sixties, is tired and doesn’t even want to continue working. Without her on board “the company’s value is significantly lower. It’s not worthless — but it’s lower,” said the investor, who spoke on condition of anonymity.

Indeed, so much rests on Sander’s shoulders and whether she has the resources and desire to buy back the company herself or partner with a private equity firm. “It all depends on whether she wants to retire gracefully or get back on the horse and win another race,” said one source close to the designer.

Another industry source said one of the big German clothing groups, such as Hugo Boss, might eventually be a taker for the Sander business. However, Philipp Wolff, director of communications at Hugo Boss, said: “There are no plans to buy Jil Sander.”

Lang’s business may prove to be an even trickier sell, even though the designer’s last collection was one of the strongest of the season and his brand still has strong potential. Valuations of the Helmut Lang business are harder to come by than those of Jil Sander. Unlike Sander, which is still a public company with a small float in Germany, Helmut Lang is 100 percent Prada owned and the Italian company doesn’t detail the brand’s profits and sales. Prada bought 51 percent of Lang’s business in 1999 and acquired the remaining 49 percent earlier this year from the Austrian designer. Financial terms of both deals were undisclosed.

In Prada’s 2003 balance sheet, Helmut Lang sales showed the biggest drop of the group’s brands, falling 33.1 percent to 27.9 million euros, or $37 million. Clothing accounted for 77 percent of sales, with footwear and leather goods — product categories that have been developed with Prada — comprising 17.4 percent and 4.8 percent of the business, respectively. Prada has blamed the slumping sales on both macroeconomic factors and ongoing repositioning. Prada has said it’s been shuttering unsatisfactory retail accounts.

Meanwhile, retailers are biding their time, and dreading more wilderness years without Sander at the helm of her company. Most said they would check out the team-designed pre-fall collection in January before making any final decision. Some are considering piecemeal buying until they have a clearer idea of the line’s direction.

Joan Kaner, senior vice president and fashion director of Neiman Marcus, said the worst part of the fallout is the effect it has on retailers and their customers. “Obviously, you can’t keep coming back and going away and coming back and going away again. Customers were just starting to come back and believe in the label and now it has been pulled away from them again.”

Should Sander’s company be up for sale, “one would hope she would buy her company back,” Kaner said.

Neiman Marcus will continue to sell the current collection, but if a design team is hired to work under her name the brand may suffer, Kaner said.

Linda Dresner, owner of the namesake store in New York, said she is trying to figure out a plan because going along with the previous changes, when Sander quit the first time, was no easy task. “It’s just so sad because the spring collection was so gorgeous. Jil has her stamp and it shows up in her elegant fit and special hand,” she added.

Klaus Ritzenhoefer, owner of edgy multibrand boutique Apropos Concept Store in Cologne, Germany, described Sander’s latest departure as horrible. “When she came back, we doubled or tripled our budget and the sell-throughs are amazing. I think we will definitely cut our budget by about 50 percent, though I will have to see the [new] collection.”

Joan Burstein, owner of Browns in London, a multibrand designer store which features a Jil Sander shop-in-shop, noted that her business was not affected the first time Sander left. “But I think we were the exception. Jil’s departure damaged a lot of people’s businesses. Who knows? Maybe this will be a new era for the Jil Sander label. Look at how many other fashion houses have gone forward with in-house design teams.”

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