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Jockeying for Position In the World of Valentino

Valentino seems to have survived the latest power play for control of his parent company - and now he could be poised for a power play of his own.

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MILAN — Valentino seems to have survived the latest power play for control of his parent company — and now he could be poised for a power play of his own.

The multibillion-dollar battle for control of Valentino Fashion Group has all the makings of an old-fashioned Italian soap opera: a designer with a glamorous lifestyle, the envy of his peers; secret suitors and alliances; a charming Italian playboy; deep-pocketed investors; the global allure of fashion, and an ambitious company chairman looking to shove aside one of Italy’s foremost industrial families.

All the while, Valentino and his business partner, Giancarlo Giammetti, have sat on the sidelines, ostensibly preparing for what many believe would be their farewell extravaganza in Rome July 6 to 8, which will include a couture show for 1,200 people, a black-tie dinner for 700, an exhibit, a book and even a documentary.

But Valentino might not be going anywhere, after all. Instead, the designer, 75, could be getting ready to flex his muscles and renew his contract yet again. After all, he has been ambivalent about the prospect of retiring, refusing to confirm the speculation. Asked by WWD in Cannes last week if he could ever see the day when he would stop making gowns, the designer bluntly exclaimed: “Absolutely not!”

He also recently told WWD’s sister publication, W, that, while he thinks about the prospect of stepping down, “the day I decide is when I decide.”

The ink on equity fund Permira’s agreement to buy 29.6 percent of VFG — and perhaps a majority — is barely dry and it has yet to lay out its strategy. But observers believe Valentino could use the change in ownership as a reason to stay at the helm of his eponymous fashion house, because the financial players would need his know-how, experience and, above all, persona if they want the brand to reach its full potential.

Well aware of the power of the media, Valentino and Giammetti have been more visible than ever in recent months, even making a rare appearance at the Cannes Film Festival last week to underscore just how pivotal the relationship between a designer and the red carpet is. The Cannes visit followed his appearance with Jennifer Garner at the Costume Institute gala in New York, which in itself was preceded by a Manhattan fashion show and endless cocktails and dinners. That New York tour followed Valentino’s two-week visit in November when he was as busy as a politician on the campaign trail — even appearing on “The Martha Stewart Show,” where he made a tomato and pesto dish he created.

Hardly the schedule of a man who is thinking of retirement.

“Knowing private equity funds, they’ll want a guarantee that Valentino will stay on,” contended a Rome-based fashion executive. “He’s still the iconic image of the brand and they need him to help maintain a smooth passage of ownership. Too many revolutions at once are frowned upon.”

Valentino is a homebody who relishes his time in his lavish manses, accessorized with butlers, in Rome, London and New York, or in his multimillion-dollar chateau, Domaine de Wideville, a 17th-century estate in the Louis XIII style in the French countryside near Versailles, France. The designer enjoys winter breaks at his chalet in Gstaad, Switzerland, and vacations aboard his 152-foot yacht, jetting each weekend throughout June and July to a different Mediterranean port where the boat has docked. He was one of the first designers to enjoy a customized, private yacht, which replaced speedboats, a passion of his younger years. The designer also is a self-professed shopper of “beautiful things,” from art pieces by Picasso or Andy Warhol to 18th-century Meissen bowls.

Valentino is said to be subdued lately about Permira’s purchase of 29.6 percent of VFG from the Marzotto family’s International Capital Growth Sarl, although he continues to decline to comment on the deal, just as he was reticent during the previous changes in ownership. However, since Valentino sold his company to Holding di Partecipazioni Industriali in 1998 for $300 million, the designer and Giammetti repeatedly have penned lucrative contracts, including clauses that guaranteed benefits for himself and his most loyal staff.

“His contracts always helped him live a high-maintenance life and indulge in priceless art collections and beautiful homes, even more so than when he was running his own company,” said a source close to the designer.

And he could be getting ready to play hardball under the ownership of a financial player with little knowledge of the ins and outs of the fashion world. “I believe Valentino’s contract expires between June and July,” said one Milan-based source, noting the designer in the past has taken advantage of the exposure of his July couture show in Paris to renew his deal.

There are, of course, other points of view. One Paris banking source said the change of ownership coinciding with the succession question at Valentino is “coincidental.” The source characterized an imminent or eventual retirement by the designer as more of a “sentimental” and “symbolic” issue than one of strategic concern. One luxury goods analyst, who spoke on condition of anonymity, said he didn’t think it was “an issue. The brand name will go on beyond the original designer.”

He noted that previous management already had been fortifying the design team in preparation for Valentino’s eventual exit.

While some observers believe Valentino is in a stronger position than ever, there are others who question whether Permira will even keep the brand. The private equity fund could spin it off in order to focus on the much larger, and more profitable, Hugo Boss operation. VFG owns 50.9 percent of the 1.5 billion euro, or $1.8 billion at current exchange, Boss, while sales of Valentino last year came to 239.5 million euros, or $369.6 million.

But one financial analyst close to Permira said the fund is poised to keep the Valentino brand, dubbing it a label with “Gucci potential in terms of brand awareness and sales growth.”

Another financial source agreed, saying Valentino is “underdeveloped” and describing the designer’s and Giammetti’s management in its early stages as “almost homemade and in no way entrepreneurial. What was important to them was their quality of their life. HdP tried to give some industrial logic to it, but did not succeed.”

Another source noted that, throughout the history of the brand, there was only one designer. “Albeit a very intelligent one, he did not have the marketing culture of a Domenico De Sole or a Tom Ford, he didn’t have an industrial culture and didn’t have the money [to expand],” noted the source. That said, under Giammetti’s leadership, the brand did venture into licensing early on — a move that helped bring in cash and expand its visibility.

Indeed, observers agreed Permira has made a smart investment — albeit one that eventually could cost it close to $6 billion if it seeks to buy all of VFG and gain control of Boss. “Both Valentino and Hugo Boss are brands that have good potential for medium-term growth,” said one luxury analyst, noting Valentino has yet to exploit the full potential of more affordable lines and Boss is doing well in the women’s business.

But a Paris-based source said the two companies are “very different assets. A possible split within a few years can be envisaged. There are always buyers for trophy assets and Valentino could be something that could be up for grabs.”

A luxury mergers and acquisitions specialist, who spoke on condition of anonymity, contended that an exit by Valentino wouldn’t be a major setback.

“The brand is already well-defined and does not really need him anymore,” the source said. “Also, the new owners would have a freer hand to do what suits the market and the brand in terms of categories, licensing and design freedom. The Valentino brand is still fairly underdeveloped. It will be interesting to see if the new owners pursue an easy, cash-spinning licensing strategy, or invest in the brand for the long term.”

As for Boss, the M&A specialist called it a respected brand that operates outside the realm of designer fashion — just the kind of label an equity fund likes. “It is a sturdy, fairly uncyclical business,” the source said. “It probably also has good license potential in emerging markets, which will be very large. Thus, an exit should be fairly straightforward on a normal [earnings before interest, taxes, depreciation and amortization] multiple.”

Observers said Valentino eventually could be sold off to an industrial group — even if some of the biggest players expressed disinterest Monday.

A spokesman for PPR said the French group was “not interested” in buying Valentino and that it was concentrating on its outstanding bid for control of Germany’s Puma as well as organic growth and the international expansion of its existing brands.

A spokesman for LVMH Moët Hennessy Louis Vuitton declined to comment. However, it is understood the French luxury giant is not eying Valentino or other fashion properties at this time. Last week, LVMH said it had acquired a majority stake in Wen Jun Distillery, a Chinese maker of premium white spirits, for an undisclosed sum. That acquisition came on the heels of Bernard Arnault-led investments in a Chinese shoe retailer, an Indian leather goods maker and the hypermarket operator Carrefour, suggesting the business titan now is placing his bets on emerging markets and real estate rather than reinventing more luxury brands.

The future of Valentino, both the man and the brand, isn’t the only question surrounding the Permira bid to buy a majority of VFG. On the management front, another blurry line is whether Matteo Marzotto will stay on as president of Valentino SpA. Marzotto is said to have laughed off his current situation, joking to confidants that he “could soon be jobless.”

Although Marzotto sold his shares to Permira, a source indicated he would be very valuable to the new owners, especially if they plan to keep the designer. “Matteo has a very good relationship with Valentino and Giammetti, he has always been a trait d’union between Rome and Milan [where the designer and the headquarters, respectively, are based] and often managed to deflate issues that were frivolous but were seen as enormous by Valentino. Matteo is a manager and he sometimes admits that designers are generally difficult, but he is a very diplomatic man,” said the source.

Marzotto, in a speech at the WWD CEO Summit in November 2005, admitted there were challenges in dealing with Giammetti and Valentino. “The two guys are not easy at all, you can imagine,” he said. “Sometimes we fight — I always fight with Giancarlo and never with Valentino. Of course, Valentino has his own habits. He really wants things in a certain way. But it’s not a major problem.”

The connection with Valentino came through Matteo’s mother, Marta Marzotto, a loyal customer and a fixture on the Italian social scene. Her son, according to the source, enjoys being a regular in the press, as well, and could be seen as “a sort of ambassador” for the brand, also given his family lineage that includes the patrician Borromeos. One of the youngest of the Marzotto clan, his escapades as a playboy are as well documented as his appetite for extreme sports. He survived dating Naomi Campbell as well as completing the Paris-Dakar cross-country race. When he’s not bicycling around Milan, Marzotto pilots his Eurocopter Squirrel chopper to his mountain retreat in Cortina, Italy.

Despite his extracurricular activities, Marzotto has managerial ambitions. “He quickly positioned himself in Michele Norsa’s office when the executive left the company,” said the source. Norsa left as Valentino’s chief executive last year to join Salvatore Ferragamo.

Of course, any role for Matteo or any other Marzotto in VFG will depend on the resolution of what already has been a messy battle for control of the group — nothing new to the tumultuous Marzotto clan. Permira bought its initial stake from the Marzottos for 782.6 million euros, or $1.06 billion, and is now in talks about buying another 24 percent from the family, which would give the fund majority control. In doing so, the fund beat out the wily Antonio Favrin, VFG’s chairman, who was angling for his investment vehicle Canova to gain control of the fashion company in a deal with Carlyle Group.

The size of the Marzotto clan — the sixth generation of an entrepreneurial family that counts about 60 members — and its well-known litigiousness has, according to a source, helped Permira seal the deal. “The Marzottos were often divided but, now more than ever, they have joined forces against Favrin,” said the source. “Gaetano, Luca and Matteo [Marzotto] hate Favrin. Sure, he’s made them rich, but together with [Canova financier Dario] Segre, he infiltrated the family with his mantra: divide et impera [divide and conquer].”

The source said Pietro Marzotto was “the only one that was able to stand up to” Favrin and, once he was pushed out as president in 1998 (by the rest of his family), there was “no charismatic leader” and Favrin took advantage of the situation. Pietro Marzotto is considered the patriarch of the family, is the architect behind the Hugo Boss acquisition and was one of the most influential entrepreneurs in Italy’s banking and financial world. He exemplified the old-school industrialist from the Veneto region who was known for his hard-working, stubborn and reclusive manners. He was such a dominant force that “some family members accused him of choosing managers that were not up to speed,” according to a source.

So, in 1998, a group of Marzottos, headed by Paolo, lamenting Pietro was not producing enough dividends, tapped Favrin, a former manager in the group’s industrial division, Zignago, to replace him. “Pietro even had to leave his offices in Valdagno, Italy [where Marzotto’s manufacturing is based], after 37 years,” said the source.

Another source said Favrin “made a lot of money by working on these internal divisions, when often compromises would have solved the problems and made things easier.” A source said Favrin is “unscrupulous” in his deal-making, but never feisty or overtly aggressive. “He is very subtle, although he may lose patience with his assistants, throwing pens at them,” said the source.

The source attributed the deepest rift within the family to the failed fusion of Gruppo Industriale Marzotto and HPI, whose name was later changed to HdP, in 1997.

Another blow to the company’s stability came six years later, when Favrin helped oust Pietro Marzotto, pushing him out via a new shareholders pact established by members of the family.

Now Permira appears poised to complete the fourth change in ownership of the Valentino fashion brand. The fund’s negotiations to buy the other 24 percent expire Monday and, if successful, would lift Permira’s VFG stake to 53.6 percent. As part of the agreement, Permira also will enter into talks with the Marzottos about “co-investment agreements” in Permira’s Red & Black Lux Sarl subsidiary, the same vehicle Permira is using to buy the initial 29.6 percent VFG stake for 35 euros, or $47.60, a share.

But intrigue goes on. One lingering question is whether Favrin’s financial vehicle, Canova, will opt to sell its nearly 20 percent stake to Permira. A source said Favrin is estranged from the Marzottos after reportedly teaming up with Carlyle. The source said Favrin has “no affection for the company and is looking to make as much money as possible” out of the sale.

A Canova spokeswoman declined to comment. But in an interview in the Italian paper Il Sole 24 Ore on Wednesday, Segre of Canova said it’s “too early to make a decision” regarding Canova’s stake in VFG. He went on to say Canova may opt to stay on as a minority shareholder if Permira puts forth a valid industrial plan and a solid management team.

“At that point, we could also consider remaining [shareholders] in the company,” he told the paper.

When asked if Canova would insist on reconfirming Favrin as chairman, Segre said no because Favrin is not an “operational manager” and Permira likely will appoint its own chairman for the company. But he specified that Canova would like to see VFG ceo Stefano Sassi, VFG general manager Luca Vianello and Hugo Boss ceo Bruno Sälzer stay at the company.

Market observers are taking a wait-and-see approach to the evolving situation at VFG because Permira’s acquisition of a majority stake in the company has not been finalized and the fund hasn’t stated its intentions for the company.

Gianluca Pacini, an analyst with Caboto in Milan, said the biggest unanswered question at this point is whether Permira will bring in new management at the company or opt to keep Favrin and Sassi.

Pacini said he thinks Permira bought into VFG because the Valentino brand still has plenty of growing room and the overall outlook for the luxury goods market is a bright one.

“Everyone is convinced that the next two to three years will be golden years for the luxury goods industry,” Pacini said.

The analyst went on to say that Permira is helping to stabilize VFG’s fragmented shareholding structure and the balance of power between Favrin’s Canova and the Marzottos.

“The group seems a bit easier to manage now,” Pacini said.

But a Germany-based analyst said he thinks Permira’s main target is Hugo Boss.

“[Valentino] is a well-known brand, but the millions of euros sales made at Valentino are meaningless compared to the billions sold at Hugo Boss,” he said.

The analyst went on to say that Permira could be working toward an eventual merger of VFG and the publicly traded Hugo Boss, a speculative market theory that had been making the rounds long before Permira bought its initial stake in the company.

As reported, Carlyle Group is no longer believed to be interested in buying VFG. By dropping out of the bidding process, Carlyle ended a potentially costly takeover battle. At the offer price, it will cost Permira 2.6 billion euros, or $3.5 billion, to buy all of VFG. But the expenses won’t end there. Once it secures a majority stake in VFG, Permira is required to launch a cascading bid for outstanding shares in Hugo Boss AG. At current market prices, buying the remaining shares of Boss would cost another 1.7 billion euros, or $2.3 billion. So it would cost a total of $5.8 billion to buy both VFG and buy out the minority shareholders in Hugo Boss.

Norsa, Valentino’s previous ceo, told WWD VFG’s price tag “seems right. It is the market that decides the price and the offer was a little above the share price.”

Norsa added he was not surprised by the sale. “It was to be expected, when a company grows as much and there isn’t a shareholder with a significant majority stake,” said Norsa, implying that was a reason for his leaving the group.

One Paris source familiar with the deal said Permira negotiated a “good price” for VFG.

“This shows the size of deals private equity can do. It’s good news for the industry. It shows there’s confidence in luxury and textiles. We haven’t yet seen haute couture in private equity. That could be a challenge.”

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