Wall Street has digested the news that the Estée Lauder Cos. is acquiring the Tom Ford brand and investors appear to be taking it in stride.
After months of speculation, the beauty giant announced Tuesday after the market closed that it has agreed to acquire Tom Ford in a transaction valuing the brand at $2.8 billion.
As part of the deal, Ermenegildo Zegna Group and Marcolin SpA will enter long-term license agreements for Tom Ford fashion and Tom Ford eyewear, respectively. Marcolin has been the eyewear licensee since 2005, while Zegna has had the license for Tom Ford menswear since around 2006. Now, it will be responsible for all of Tom Ford’s fashion business.
In after-market trading, Lauder’s shares fell marginally, but on Wednesday, investors appeared to be relatively unphased by the company’s largest acquisition to date — shares dipped slightly, by 1.8 percent, to close at $222.91.
It was a similar story for the publicly listed Ermenegildo Zegna Group, which is becoming a long-term licensee of the former for all of Ford’s men’s and women’s fashion, accessories, underwear, fine jewelry, childrenswear, textile and home design products. Zegna’s 20-year licensing agreement with Lauder allows for an automatic renewal for additional 10 years. As part of this transaction, Zegna will acquire operations of the Tom Ford fashion business. The company’s shares ended the day up 2.3 percent to $10.97.
Of the deal, Olivia Tong, an analyst at Raymond James, said: “This is EL’s largest deal to date, with now full control of a fast-growth brand pivotal to what we expect will be EL’s eventual recovery in China and travel retail. Importantly, we expect minimal transition disruption in the non-beauty portions of Tom Ford, as Marcolin continues as the brand’s eyewear license partner and fashion brand Ermenegildo Zegna will continue as the brand’s fashion, accessories [and] underwear partner.”
Given Tom Ford’s super-premium positioning in beauty, she believes the brand should continue to be a growth driver for Lauder, with the brand’s fragrance line ranking number 15 in the U.S. and number 10 in China, while increased door expansion and consumer mobility should support makeup growth.
“Unlike prior M&A transactions, [Estée Lauder] already operates [Tom Ford] beauty business, allowing for a seamless transition, giving EL the ability to unlock the brand’s full profitability potential, and increasing exposure to the attractive lux beauty market. As expected, TF fashion and eyewear will be outsourced,” said Ashley Helgans, an analyst at Jefferies.
In particular, she noted that the acquisition will allow Lauder to propel Tom Ford into new channels and markets. “Currently, the Tom Ford beauty brand is 47 percent cosmetics, 50 percent fragrance, 3 percent skin/other. Skin accounts for 50 percent of the EL portfolio, so we believe it’s likely they will leverage their expertise in prestige and luxury skin care to grow the skin segment of the TF brand. Building out the skin care category provides favorable lift to margins given skin care carries the highest operating margin, followed by fragrance, then makeup.”
Under the agreement, Tom Ford, founder and chief executive officer of Tom Ford, will continue to serve as the brand’s creative visionary after closing and through the end of calendar 2023. Domenico De Sole, chairman of Tom Ford International, will stay on as a consultant through that period, too.
For Zegna, which owns Thom Browne, Luca Solca, senior research analyst of global luxury goods at Bernstein, said it was a good deal. “It allows it to consolidate the license and to further develop after the acquisition of Tom Ford. I don’t believe the exit of Tom or Dom is a concern — it’s in the nature of things.”
One Milan, Italy-based luxury consultant, who asked to speak on condition of anonymity, said for Zegna, acquiring the Tom Ford fashion operations is a new way to aggregate different businesses. “It appears that the IPO has made Zegna more courageous in its choices, creating synergies, while each company does its best within each area of specialization.” Zegna publicly listed on the New York Stock Exchange in December last year.
In addition to being a longtime Tom Ford menswear licensee, Zegna was also a shareholder, with a 15 percent stake in the company, so this new development is seen as “a natural step,” said the consultant, which “will allow Zegna to strengthen its womenswear segment, and the group at large. Zegna has a strong supply chain built over the years and its textile or knitwear pipeline can be put to good use. The sky’s the limit, it’s all to be shaped and formed and [chairman and CEO] Gildo Zegna will surely create an appropriate structure to fuel the brand’s development.”
Another Milan-based analyst saw this as a “natural evolution,” as Gildo Zegna is building the business based on a web of personal relations cemented over the years. “I don’t think he is adding Tom Ford for the sake of it, and Gildo said at the time of the IPO last year that he was aiming high,” he said. “Two American luxury brands will be more and more Made in Italy and Gildo will surely be proud of this.” As for the possible exit of Ford after one year, the analyst was not concerned. “The foundations are solid,” he opined.
There is always an option for Ford to renew his contract after a year, or stay on as a consultant, pointed out Armando Branchini, executive chairman of luxury goods consulting firm InterCorporate, who was more confident in the future with or without Tom Ford. “This is a great opportunity for Zegna, and the agreement spanning over two decades gives him the freedom and the time to help grow Tom Ford as it did Thom Browne,” said Branchini. “I believe Fabrizio Freda [president and CEO of Lauder] was reassured by the presence of Zegna and Marcolin, which guaranteed Lauder the management of business areas that are outside its core perimeter.”
Italian eyewear-maker Marcolin, a longtime Tom Ford licensee, is signing a perpetual agreement with Lauder for the production and distribution of the brand’s eyewear collections. Marcolin will pay $250 million through available cash, together with a capital increase of at least 50 million euros.
Branchini noted that, in addition, Lauder and Zegna have the retail expertise that can help Tom Ford develop its own network of stores.
“Fabrizio and Gildo are two managers of great experience; they are both rigorous and they get along, so they will maintain the same positioning of the brand, but improve its performance. It’s a win-win for everyone, starting from Tom, who is providing a long-term future for his brand,” Branchini said.