By  on May 17, 2007

MILAN — Valentino Fashion Group has a new investor — but the bidding battle could have just begun.

Confirming a WWD report, private equity fund Permira has acquired 29.6 percent of VFG from the Marzotto family's International Capital Growth Sarl for 782.6 million euros, or $1.06 billion at current exchange. Permira, which was supported in the deal by merchant bank Mediobanca, Unigroup and Citibank, said it is interested in increasing its stake in VFG by buying additional shares at the same per-share price of 35 euros, or $47.60. The deal values all of VFG at almost 2.7 billion euros, or $3.7 billion.

But the deal Wednesday immediately stirred a wave of speculation over the future of the group, which owns Valentino SpA, a majority stake in Hugo Boss AG and men's wear brand Lebole, and holds licensing deals for M Missoni and Marlboro Classics. Permira had been locked in a bidding battle with private equity fund Carlyle Group, which had linked with VFG chairman Antonio Favrin and his company, Canova Partecipazioni Srl, to buy the Marzotto family stake. Canova owns 20 percent of VFG.

Carlyle officials declined comment Wednesday on their next move, but sources told WWD it remains in talks with VFG shareholders and still could mount its own offer for control of the group. A source close to the company said the bidding could go as high as 50 euros, or $67.65, a share.

Despite selling a 29.5 percent stake, the Marzottos control almost 24 percent of VFG through two other financial companies: Gaetano Marzotto and a number of other family members control Tidus Srl, which owns 12.43 percent of VFG, while Paolo Marzotto's PFC Srl controls almost 11 percent of the group. (Officially, PFC controls 7.45 percent of the shares, but a source close to the situation said the amount reaches almost 11 percent when other family members are taken into account.)

A well-placed source here said Favrin first had tried to convince the Marzottos to sell VFG, in which Favrin's Canova owns 18.78 percent. However, according to the source, Favrin and his partner in the Canova company, Dario Segre, subsequently bypassed the Marzottos and teamed up with Carlyle to secure management positions in the group, while at the same time negotiating a fee of 18 million euros, or $24.5 million, for initiating a Carlyle purchase of VFG."This really irked the family, who went back to Permira, an initial bidder, to cut out Carlyle and Canova," said the source. "Permira was willing to buy the Canova shares, but there was a rough meeting between the parties and the deal fell apart."

Favrin's future at VFG remains uncertain. One source said he is likely to depart. "He might stay on as a transition, but when the new owners take control, they'll have him out," said the source.

Whether the Marzottos retain their shareholding also remains to be seen. "There is no real affection for VFG because the family was forced into creating it, the spin-off — the division between the textile and fashion businesses were Favrin's ideas, not the Marzottos," said a source. In 2005, Marzotto spun off Valentino, a controlling stake in Hugo Boss and other clothing assets into the new VFG, listing it on the Milan stock exchange.

Approached on the sidelines of the Pitti Uomo press conference in Milan on Wednesday, president of Pitti Immagine Gaetano Marzotto said he was taking a wait-and-see approach to developments. "Everything is open right now," he said.

When asked if Permira had approached Tidus or made a bid for its shares, Marzotto declined to talk specifics. "We have contact, but we have no idea what kind of propositions will arise," he said. "What interests us the most is the future of the company. It's a magnificent company that has been built over many years. We're evaluating — with the small [ownership] we have — what the best step is for the company and its collaborators."

He noted that a generational shift took place when Pietro Marzotto left the company in 2003 [when he was pushed out by a new shareholders pact established by members of the family]. Marzotto said his family considers VFG a long-term strategic investment, whereas other investors view the company as a short-term money-making opportunity. "Our approach is different," he said.

One Milan-based source said Permira is still trying to buy the Canova shares and then launch a tender offer. "The issue, however, is not the equity structure but who will manage the company, and that depends on who is behind this whole operation," said the source, who believes it is Favrin who spearheaded the deal and who will continue to manage the group."The Marzottos have sold the business and none of them was in a management position," said the source, noting that operating decisions are all made by Favrin, although Matteo Marzotto was president of Valentino SpA. "That's one of the reasons [Michele] Norsa left, because he was closer to the Marzottos and was in Favrin's way — he was not a yes-man," said the source.

Norsa was Valentino's former chief executive officer and is now in the same position at Salvatore Ferragamo.

The source speculated that Permira will buy either the Canova shares and then submit a tender offer, or both the Canova and Tidus shares. The source said Carlyle's original intention was to buy the Canova and ICG shares at the same time, before problems arose between Segre and the Marzottos.

The prize appears to be Hugo Boss, VFG's cash cow, rather than the much smaller Valentino brand. But the Permira deal — and any other subsequent battle — marks the fourth change in ownership of Valentino since 1998, when the designer and his business partner, Giancarlo Giammetti, sold the company to the now-defunct Holding di Partecipazioni Industriali for $233 million, three times the house's direct revenues. The sale marked the first association between fashion and finance at the time, and was an emotional moment as the designer shed tears at the announcement of the preliminary agreement. Valentino and Giammetti held minority stakes in HdP and seats on its board.

Valentino languished in the red under HdP, however, which also owned the once-mighty GFT manufacturing company. Marzotto bought the designer company in 2002 for $210 million (including Valentino's net debt of $179.2 million), putting the designer under contract. Marzotto, which started out as a woolen mill in 1836, made its first fashion foray when it bought Hugo Boss in 1991. Hugo Boss officials declined to comment Wednesday on the sale to Permira.

The designer, who turned 75 last week, is set to mark his 45th anniversary in fashion in Rome July 6 to 8, and there continues to be speculation he will use the occasion to retire. The designer will host a retrospective installation on the Friday evening inside the Richard Meier-designed Ara Pacis Museum.On July 7, Valentino will present his fall couture show, and later that night, will host a black-tie dinner. Suites at the Hotel Eden and the Hotel de Russie already have been booked and, in a recent W interview, Giammetti said this was going to be "the best event in the history of fashion."

Marzotto is said to have been searching for a designer to replace Valentino for the last two years but has been unable to identify a suitable candidate. While Valentino remains committed and fully involved in the design of his collections, he also is renowned for his extravagant lifestyle and beautifully decorated homes. In fact, the cost of this lifestyle was said to be a sticking point during the negotiations with Marzotto when it was acquiring the design house, since there were rumors the designer and Giammetti were trying to wring from Marzotto the same perks they were accustomed to under HdP, although that was always denied by the parties involved.

When asked last week if the designer's possible retirement could affect the choice of a buyer, Stefano Sassi, VFG's ceo, said that, while his strong contribution was undeniable, it would be "limiting to measure the strength of the group on one person." A spokeswoman for Valentino himself and Giammetti did not return phone calls requesting comment on Wednesday's deal.

While some retailers in the U.S. and Europe said the label needed updating, most praised Valentino's style.

Ann Stordahl, executive vice president of women's apparel at Neiman Marcus, said, "Valentino is one of our most important businesses in our couture area and we carry it in most of our strong, couture stores. We have just opened a boutique in Houston, and one in San Francisco and Boca Raton [Fla.] — we will also be opening a boutique in Los Angeles. We also carry Valentino furs and Valentino Roma."

Another U.S. retailer, who requested anonymity, said the brand has been performing well.

"[Valentino] is one of the best designers for women's wear and his collections make any woman beautiful," said Michele Giglio, owner of seven boutiques in Palermo, Italy. Giglio said he'd seen improvements in the quality after Marzotto took over the brand, especially over the past two years.Toni Tanfani, owner of two Gisa stores in central Italy, said "the quality, the class and the style" of the brand remain "excellent," but said it needs "to be renewed and modernized."

One European retailer, who spoke on condition of anonymity, said the brand "is not performing in a brilliant way," and it is not contemporary enough. "It's lost its appeal and needs a new design input."

But while the designer's clout on the fashion world is unique, his business remains small compared with that of Hugo Boss. A source said the "draw of the Valentino brand only marginally affected" the desirability of the deal.

The lion's share of VFG's sales comes from Hugo Boss AG, despite the consistent growth of the Valentino brand. In March, VFG posted year-end revenues of 1.96 billion euros, or $2.46 billion, a 13.6 percent increase compared with the previous year. Hugo Boss had sales of 1.5 billion euros, or $1.8 billion, a 14.2 percent increase compared with 2005. Sales at Valentino rose 14.5 percent last year, to 239.5 million euros, or $301.7 million. Marlboro Classics and M Missoni reported combined sales of 293.3 million euros, or $369.6 million, a 10.1 percent increase. Dollar figures have been converted from the euro at average exchange rates.

Some highlights of last year underscored by management last week during a shareholders meeting included a 25 percent increase in sales at the Valentino couture division and a 34 percent growth in shoes and accessories, accounting for 20 percent of sales.

One financial source said VFG exemplifies a private equity fund takeover target. "It's their job to identify companies that are politically unstable or torn by internal tensions, and play each party against the other," said the source, noting how Bahrain-based investment bank Investcorp operated in order to win Gucci in the Nineties, initially putting heir Maurizio Gucci against the family, then executive Domenico De Sole against Maurizio. "The goal is to find underperforming brands or firms in an industry that works well and maximize profits over a three-to-five-year period," said the source.

While Favrin as late as last week dismissed any squabbles between shareholders, the Marzottos — a large clan of siblings, cousins, grandsons and nephews — are known for their recurring feuds.Permira is the latest private equity fund to enter the fashion industry — a lucrative sector that is increasingly appealing to cash-rich investors. Last year, London-based private equity group Change Capital bought Jil Sander from Prada Group and TowerBrook Capital Partners took control of Jimmy Choo in February.

— With contributions by Courtney Colavita, Milan, and Vicki Young and Sharon Edelson, New York

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