The industry has a new $16 billion eyewear colossus.
The powerful new company, called EssilorLuxottica, was formed by the merger of Italy’s Luxottica Group and Essilor of France and is likely to transform the sector’s global landscape and spark both further technological innovation and deals.
The market and industry analysts gave the news a thumbs up. On Monday evening, Luxottica shares closed up 8.25 percent at 53.65 euros, or $57.07 at current exchange rate. Essilor’s shares rose 11.6 percent to close at 114.20 euros, or $121.05.
Luca Solca, managing director, sector head global luxury goods at Exane BNP Paribas, characterized the deal as “excellent news for both stocks” since it creates significant synergies in revenues and costs; “defuses the risk of heightened competition between the two,” and “removes uncertainty on [management] succession at Luxottica.”
The Italian group produces eyewear under license for names including the Giorgio Armani Group, Bulgari, Burberry, Chanel, Coach, Prada and Versace and also has a number of owned brands, such as Ray-Ban, Oakley and Persol. It and Essilor, the leading maker of lenses worldwide, have agreed to a 46 billion euro, or $48.7 billion, merger to form an eyewear powerhouse with annual sales of more than 15 billion euros, or $15.9 billion at current exchange.
Mergers are often conceived “to reduce costs and jobs, but in this case I believe it is meant to maximize synergies,” said Armando Branchini, deputy chairman of Milan-based InterCorporate. “I don’t think there will be layoffs; on the contrary, new jobs may be in the cards.” Branchini said he was convinced there were “strong strategies” that supported the deal.
He contended that former Luxottica chief executive officer Andrea Guerra first conceived the idea of a merger with Essilor before his departure in September 2014, but that the Italian company’s founder and executive chairman Leonardo Del Vecchio strongly opposed it. Sources at the time said this could have been a reason for Guerra’s exit from the company after a 10-year tenure.
“This veto pushed Essilor to start restructuring its organization, changing its focus on industrial production and becoming more of a provider of customer services.” For this reason, Branchini explained, Essilor is a changed and improved firm today and can be more easily integrated with Luxottica as the two companies’ cultures are closer.
Luxottica and Essilor combined will have more than 140,000 employees and sales in more than 150 countries.
“Together, Essilor and Luxottica will be in a stronger position to address the vision needs of the 7.2 billion people in the world, out of which 2.5 billion people still suffer from uncorrected vision problems,” the companies said Monday. “This transaction would allow the combined group to better seize growth opportunities resulting from strong demand in the eyewear market, driven by the increasing need for corrective and protective eyewear and the appetite for strong brands. The combination would create a key player, operating across all segments of the eyewear industry.”
In the new entity, Del Vecchio will serve as executive chairman and ceo and Hubert Sagnières, Essilor’s chairman and ceo, will become executive vice chairman and deputy ceo. Del Vecchio and Sagnières will also keep their positions of executive chairman of Luxottica and chairman and ceo of Essilor International, respectively.
After the transaction, Del Vecchio will take a stake of 31 percent to 38 percent in EssilorLuxottica via Delfin, his family’s holding company, which is to be the largest shareholder in the new combined group.
Delfin will contribute its entire stake in Luxottica, representing about 62 percent of the company, at a ratio of one share in Luxottica for each 0.461 of an Essilor share. Then Essilor will launch a mandatory exchange offer for all remaining Luxottica shares, at the same ratio, with the view of delisting Luxottica’s shares.
The deal is expected to close in the second half of 2017.
It is understood the new company will be listed on the Paris Stock Exchange, Branchini said.
“It’s a pity for the Milan Bourse,” he added, while underscoring that Luxottica has guaranteed that production, distribution and other strategic steps will remain in Italy. Asked about possible scenarios for Del Vecchio in the future, Branchini said it was too soon to tell, as it will take between two to three years for the two companies to be fully integrated.
“In the past we think Luxottica would not easily have accepted a merger on equal terms with Essilor,” agreed Gian Luca Pacini, equity analyst branded goods at Intesa SanPaolo. “Now they must solve the generational handover in the wake of the difficulties encountered with the former [Luxottica] ceo [Adil Khan], who left after only one year — with a hefty severance pay. Today a group expanded to the industry of lenses and with a world leader surely affords more stability. Important luxury brands under the Kering and LVMH umbrellas will forge joint ventures with specific producers, which could cause potential problems for Luxottica, too, in the medium-term.
“The two companies’ boards will focus on their specific activities, while the newco remains a leader with a good balance sheet and can perhaps buy other brands and expand distribution online and continue to renovate its retail network. The 0.46 ration for us is fair, implying a value for Luxottica at around 47 euro considering the 102 euro price of the Essilor shares on Friday.”
In January 2016, after only one year, Khan left his role as ceo for markets at Luxottica and Del Vecchio assumed executive responsibilities for the area. The co-ceo positions had been created by Del Vecchio on the heels of Guerra’s departure in September 2014, and Massimo Vian was appointed ceo for product and operations. The binary executive roles took the industry and the market by surprise, with several analysts questioning the decision at the time.
Luxottica had for decades relied on stable management under Del Vecchio until the departure of Guerra, who contributed to the global expansion and clout of the company. In October 2014, Del Vecchio took on the role of interim ceo after the departure of Enrico Cavatorta, who had been appointed ceo of corporate functions and interim ceo of markets, only a month earlier.
Looming behind the executive changes was the future of the company’s shareholding structure as Del Vecchio has six children by three different women.
“With this agreement my dream to create a major global player in the eyewear industry, fully integrated and excellent in all its parts, comes finally true,” said Del Vecchio, who founded Luxottica in 1961. “It was some time now that we knew that this was the right solution but only today are there the right conditions to make it possible. The marriage between two key companies in their sectors will bring great benefits to the market, for employees and mainly for all our consumers. Finally, after 50 years, two products which are naturally complementary, namely frames and lenses, will be designed, manufactured and distributed under the same roof.”
Sagnières underscored Luxottica’s “extraordinary success,” and how the group had built a stable of “prestigious brands, backed by an industry state-of-the-art supply chain and distribution network. Essilor brings 168 years of innovation and industrial excellence in the design, manufacturing and distribution of ophthalmic and sun lenses.” He said the agreement would accelerate both companies’ global expansion.
On Monday, Luxottica was Barclays “Top Pick” following the announcement of the merger, with the bank characterizing the deal as creating “a major force in the sector.”
With a “Buy” rating, UBS said in its report that, “based on preliminary calculations, the new company sales should be well balanced between lenses (37 percent of sales), retail (35 percent of sales), wholesales/sunglasses & readers (27 percent of sales) and equipment (1 percent of sales). By geography, North America should remain the largest region (around 50 percent of sales), ahead of Europe (around 20 percent) and Asia (around 16 percent of sales).
According to Euromonitor International, the global eyewear market is worth $121 billion and Luxottica is the leading eyewear company with a 14 percent share in 2015, up from 12 percent in 2010. Essilor follows with a 13 percent share, up from 11.05 percent in 2010.
“The merger of Luxottica Group SpA and Essilor International SA would see global leaders in spectacles taking up almost 40 percent in the spectacles market combined,” said Jasmine Seng, personal accessories industry analyst, Euromonitor International. “Luxottica Group SpA leads the global spectacles market with 16.5 percent market value share in 2015, with Essilor International SA trailing behind taking up 15.4 percent of the global spectacles market value share.”
The merger would see the two combined “gaining a strong foothold in respective categories within spectacles.” The new company is expected to be “dominating all subcategories from sunglasses to spectacle frames, spectacle lenses and ready-made reading glasses,” it said.
Seng also noted that, following the decision of Kering Group to terminate its licensing agreement with Safilo Group and set up its own eyewear division, this merger “would be another severe blow” to the latter, which takes up 4.3 percent of the global spectacles market.
“Despite being Luxottica’s strongest competitor in the spectacle frames and sunglasses market, overtaking the new powerhouse position would be even more challenging in both markets for Safilo. In turbulent economic times, mergers and acquisitions would proliferate as market leaders would eke out competitors as organic growth is no longer sustainable,” Seng said.
As per the latest figures released in October, Luxottica reported a 3.2 percent increase in sales in the three months ended Sept. 31 to 2.23 billion euros, or $2.42 billion.
Essilor was advised by Citi and Rothschild, while Mediobanca served as the adviser to Luxottica.