LONDON — A yellow brick road of M&A lies ahead for the big fashion, luxury and online retail groups in the U.S. and Europe — if they’re in the mood to follow it.
On Monday, HSBC’s global luxury goods team laid out the case for asset purchases by the likes of LVMH Moët Hennessy Louis Vuitton, Kering and Coach. As for the big online retailers, there will be more consolidation ahead.
HSBC continues to argue that decade-high valuation levels, large amounts of cash, low interest rates and a change in the luxury business model, which is now based on organic growth rather than new store openings, implies a greater likelihood of future deals.
“We think much more transformation is likely for the sector from an M&A point of view,” said the report, which nodded to the deals already done this year: LVMH and Dior Couture, Coach and Kate Spade, Michael Kors and Jimmy Choo. “M&A will remain a key theme for the next 12 months as predators digest their acquisitions and possibly gear up for more ahead.”
Unlike in the past, the rationale for M&A has absolutely nothing to do with back-office synergies. Instead, it’s about the long-term growth prospects of the target company, or because the fashion and luxury titans think they can do better than the current management team.
Sometimes, it’s both.
The report did point out that while LVMH still has the firepower to make further acquisitions, it’s doubtful whether the French group will strike again soon. “We believe the Dior tie-up could signal that there may be no other compelling sizeable targets available for LVMH at the moment,” said HSBC.
Proffering its own advice, the bank said LVMH “may want to consider” building scale in skin care or makeup as it believes the French giant’s beauty portfolio is too skewed to the lower growth, lower-margin fragrance category. It pointed to the success of Sephora as a distribution channel, and argued that skin care brings with it loyalty and higher margins — never a bad thing.
Hard luxury also offers a wealth of opportunity for LVMH, according to the bank, which reiterated its opinion that having Tiffany, with its “New England rigor,” and Bulgari, with its “Roman exuberance,” in the same portfolio would make sense. “However, we also think that if LVMH has chosen not to chase Tiffany, it could be because the controlling shareholder may just believe there are better assets out there — or more sizeable ones,” such as a tie-up with Richemont or Rolex.
The bank also said that LVMH’s purchase of luggage-maker Rimowa nodded to possible further diversification of its portfolio. It said buying Rimowa was “an ingenious way to capture consumer aspirations and spending patterns shifting from product accumulation to travel and experiences.”
While HSBC may be uncertain about LVMH’s M&A intentions, it sees Coach as poised to be a “serial” acquirer, and even argued that the U.S. group should change its name as it builds out its product and brand portfolio.
“We have heard many U.S.-based investors mention that multibrand groups cannot work in the U.S. We strongly disagree. First, we are convinced monobrand companies in the soft luxury sector are at risk because of fashion and/or volatility. Second, we believe the management team at Coach has the ambition and the capacity to build a strong, diversified group to replicate the European groups’ success in a more affordable brand positioning.”
HSBC pointed out that while the company now finds itself in a net debt position, “we wouldn’t rule out similar deals in the next year or two, as the group moves swiftly from a monobrand to a ‘democratic luxury American LVMH’ status. As cash generation is high, we believe the group could potentially add several brands in the future.”
Kering, it said, will continue to seek out high-quality luxury brands that it can add to its existing portfolio based on its history, although the group is constrained financially and limited by high leverage. HSBC said that if Kering offloaded its majority stake in Puma it could go on to make a “sizable” acquisition.
While the Gucci brand is doing very well, the bank said, “this is not going to last forever. As we expect Gucci to represent 70 percent of group EBIT this year, it is just good management to diversify and/or de-risk the portfolio.”
By contrast, the bank believes the big watchmakers such as Swatch and Compagnie Financière Richemont won’t be on the same yellow brick road journey as the others.
It said the fact that both passed on buying Breitling, which was eventually sold to CVC Capital Partners in April, is “very telling. We see the lack of interest for Breitling as a warning for what sustainable growth may be in the category. We don’t expect Swatch or Richemont to look at much.” It added that Rolex, Patek Philippe, Audemars Piguet and Chopard could be potential targets due to their size and capacity to grow.
As for the online players, the bank sees more “asset consolidation” in the sector, and pointed to deals such as Apax Partners’ purchase of Matchesfashion.com and a possible initial public offering for Farfetch, although the company has repeatedly said a public listing is not imminent.
As for Yoox Net-a-porter Group, HSBC does not believe that it will shortly purchase other assets, or be a target itself. “The history of e-commerce developments has been one of asset consolidation. YNAP itself is the recent merger of Yoox and Net-a-porter, and with scale and management quality being key differentiators in the space, we think it is likely that the space as we know it will change.”