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Versace Rumors Swirl Over Potential Partners To Aid Balance Sheet

The latest buzz around the house of Versace is that IT Holding chief Tonino Perna has approached Santo and Donatella Versace to form a joint venture.

MILAN — Just like vivid prints and sexy silhouettes, rumors seem to be a constant chez Versace.

The latest one to swirl around the fashion world late last week is that IT Holding’s chief Tonino Perna has approached Santo and Donatella Versace about forming a joint venture between his fashion and manufacturing group and the famous, but financially struggling, house.

This follows such wild rumors as the one that Tom Ford and Domenico De Sole wouldn’t renew their contracts at Gucci Group in order to take over control of Versace (which was denied) to reports that Luxottica chairman Leonardo Del Vecchio has invested up to $40 million in Versace and would eventually seek to buy the company (which Luxottica also denied this summer, although Del Vecchio has joined the Versace board).

A Versace spokesman Friday denied the latest, IT Holding, rumor, which was first published in a local business weekly. “The company is not for sale, nor is it involved in any merger and acquisitions discussion with IT Holding or any other organization,” he said.

Similarly, IT Holding sent out a terse release Friday denying any negotiations with Versace: “For the second week in a row, IT Holding is forced to deny what is contained in an article published by a financial weekly regarding meetings with the Versace Group to merge the two groups. The hypothesis was not only never presented to the Versaces, but never even considered by IT Holding.”

But the clock is ticking for Versace in more ways than one, related to the fashion house’s complicated shareholding structure and some of its debt.

Versace has been struggling over the last 18 months, as have many fashion and luxury goods houses. As reported, Versace posted a net loss of $6.8 million in the year ended Dec. 31, 2002, compared with a profit of $8.5 million in 2001. The trying market conditions, complicated by the war in Iraq and SARS, caused sales to dip 5.4 percent to $564.6 million from $596.8 million. In local currency terms, net losses totaled 5.8 million euros, compared with profits the year before of 7.3 million euros. Sales fell to 482.8 million euros from 510.3 million euros.

Operating profit last year dropped 27.6 percent to $15.7 million from $21.6 million. Net financial debt increased to $151.9 million from $117.6 million.

That said, many agreed that the Versace brand still has strong allure and significant potential, and that the recent whirlpool of speculation is a little gratuitous.

Versace also has been working to get its house in order. Earlier this year, it appointed a new interim chief executive officer, Fabio Massimo Cacciatori, and began preparing a four-pronged industrial plan to return the house to the black. The plan is expected to be completed within the next few weeks and involves cost-cutting on all fronts, from advertising and manufacturing to retailing and licensing.

In addition, it signed a new 10-year eyewear license with Luxottica.

Regardless of the results of the new restructuring plan, though, there are two deadlines looming next summer that could spur Versace to seek some kind of joint venture or financial deal. In July, the house has to repay a $117.8 million, or 100 million euro, bond and right now, many observers agreed, the company doesn’t have to resources to do it. Versace has said it may seek a fresh bank loan to repay the bond.

Then there is its shareholding structure. Gianni Versace, who was murdered in Miami in 1997, bequeathed 50 percent of the fashion house to his niece Allegra Beck; 20 percent to his sister, Donatella, and the remainder to his brother, Santo. Allegra Beck, the daughter of Donatella Versace and her former husband Paul Beck, turns 18 next June and thus, under Italian law, will immediately become the company’s majority shareholder. Presumably she will then have total and free control of her slice of the pie for the first time.

“If Donatella thinks that she has the majority just because her daughter holds that stake then she is mistaken because your children can disagree with you,” stated one source close to the company.

Stressed another, “A lot comes down to Allegra. Even if someone buys Donatella’s and Santo’s stakes, that is still only 50 percent — that’s not control, as she [Allegra] has the other half of the company.”

That Santo and Donatella fight like cats and dogs seems to be more reality than fashion legend. However, it seems unlikely that Santo would exit the scene altogether and sell his stake. “He is very attached to this company, which he co-founded with Gianni. [Selling his stake] would definitely not be his first choice,” said a source close to Versace.

Observers believe, though, that the Versaces must reach some kind of financial deal in the near future. And, despite their denials, a link up with IT Holdings and Perna appears on paper to make sense. Perna’s intent reportedly would be to build an Italian luxury goods group based on Ferré, which IT Holding acquired in December 2000, and Versace. IT Holding’s stable also includes Malo, Gentryportofino and Romeo Gigli.

Adding fuel to the rumor is that IT Holding already produces the Versus and Versace Jeans Couture and Signature lines under license and that Perna and Santo Versace are good friends, noted some sources.

“I believe that [Perna and Santo Versace] have met to discuss this possibility because both have always seen eye to eye, even in difficult moments,” a source close to IT Holding said Friday. “There’s a sort of mutual respect between the two, in part due to the fact that Versace was IT Holding’s first licensee.”

Versace and Perna joined forces in 1988, when they inked a deal for IT Holding to produce and distribute Versus; Versace Jeans Couture and Signature were added two years later. Other brands licensed to IT Holding include D&G and Just Cavalli.

It’s no secret that Perna — who, with the help of former ceo Giancarlo di Risio, has built a solid business — wants to up the luxe quotient of his group. IT Holding reported a hefty 141.8 percent increase in 2002 net income to $23.5 million compared with 2001, as sales rose 24.4 percent to $700.2 million. When the results were issued, Perna said he expected 10 percent sales growth for the current year, unless “more tragic events” connected to the war in Iraq were to occur. In the same period, Ittierre, which produces the young lines and is part of IT Holding, reported a 20 percent increase in sales to $546.3 million (467 million euros).

At the same time, in line with Perna’s strategy to focus on his core designer brands, GTP Holding SpA, which he controls, has sold its majority stake in the Diners Club Europe franchise to Citigroup, which has acquired full control over the consumer cards business. Terms of the transaction were not disclosed.

“I wouldn’t put [such a deal] past Perna. I know he’s interested in raising his profile in the luxury world and this could be a way to do it. He’s a very far-sighted entrepreneur and I’m pretty sure he has addressed this issue,” said another source close to IT Holding.

A third source also viewed the teaming up of Versace and IT Holding as a logical solution. “Santo is very focused on the business side and it’s a given that he argues with Donatella, who sometimes has a limited interest in generating economic success as she is more concerned with getting a result imagewise,” said this source. “Gianni was unique in that he was able to do extraordinary things imagewise but that were economically viable.”

A possible fusion would allow Versace to exploit IT Holding’s highly efficient verticalized structure, enabling the fashion house to streamline costs without sacrificing quality or its commercial network.

But while the IT Holding-Versace rumor is widespread in Milan, some argue that Perna has his hands full with the restructuring of Ferré and wouldn’t want to take on an extra burden, given the tough financial waters Versace is navigating.

“Perna is still focusing on Ferré, in which he channeled many financial resources,” noted a source. “What’s more, he esteems all of his partners and would feel awkward making such an offer to one of them.”

In 2002, the Ferré brand, fully consolidated by the group by last summer, registered sales of $121.9 million and reported that Ferré licensees garnered sales of $138.9 million. During the year, IT Holding invested a total of $42.5 million in the consolidation of Ferré, the expansion of the eyewear division headquarters in Padua and the start-up of its perfume division.

But beyond that, there are two other potential obstacles to an IT Holding-Versace deal. The first is whether or not Perna has the cash to complete a merger or acquisition. A source noted that Luigi Giribaldi, a well-known Italian corporate investor who owns 26 percent of IT Holding, is apparently ill, which may mean he’ll sell his stake to Perna. While the transaction wouldn’t equal more cash flow, it would boost Perna’s credibility with the banks, noted a source.

At the end of the day, though, it all boils down to the Versaces and their company’s complicated shareholding structure. Some observers say that the potential difficulty of getting Donatella and Santo Versace and Allegra Beck to agree on a deal could present a challenge for possible investors.

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