Model on the catwalkLanvin show, Autumn Winter 2017, Paris Fashion Week, France - 01 Mar 2017

PARIS With its $1.35 billion acquisition of Jimmy Choo at staggering multiples, Michael Kors yanked the fashion industry out of a summertime lull, leading some to speculate it might shore up appetite for luxury transactions.

But experts say the deal-making landscape remains unpredictable, with future acquisitions likely coming in smaller sizes.

LVMH Moët Hennessy Louis Vuitton and Kering have both indicated recently they’re not on the lookout for acquisitions. Meanwhile, uncertainty reigns over the future role of investment funds from Qatar, which include Valentino owner Mayhoola for Investments, as the country grapples with an embargo by its Gulf neighbors.

That leaves private equity players, known for their reluctance to pay high prices, poised to take on an increasingly important role in deals in the luxury space.

“I’m of the view that we might not be seeing massive deals in the sector anymore, but will rather continue to see smaller deals,” said Alyssa Gallot-Auberger, who heads the consumer goods and retail industry group for law firm Baker McKenzie.

Also dampening deal flow is the fact that buyers are mainly interested in “true luxury brands with a significant heritage,” noted Karen Walker, senior managing director of investment banking firm Michel Dyens & Co. “And true luxury brands are rarely for sale.”

A case in point is Lanvin, which has been struggling to stem a decline in sales over recent years, generating speculation about  the intentions of its majority owner, Taiwan-based media magnate Shaw-Lan Wang.

Lanvin should be for sale, but its majority shareholder has so far not been interested,” said Elsa Berry, managing director of the boutique mergers and acquisitions firm Vendôme Global Partners LLC.

Still, the entrepreneur occasionally puts out discreet feelers. According to one source, she recently approached a European group that was lukewarm on the investment.

Private equity is a natural investor in luxury, given the industry’s relative resistance to economic cycles compared to other sectors, making it possible to borrow a lot against a business.

The proportion of deals in the sector involving private equity has steadily increased over the past several years, rising to 51 percent of luxury deals in Italy, France and the U.S. in the first half of this year from a rate of 36 percent in the year in 2013, according to figures from the consultancy firm EY, formerly known as Ernst & Young. Roberto Bonacina, partner and advisory M&A lead for fashion and luxury at EY, sees the trajectory continuing: “Step by step, year by year, their role becomes more and more relevant.”

But while funds are under pressure to invest the large amounts of money at their disposal, they have a reputation for discipline and tend to balk at high prices. In the low interest-rate environment, prices of potential targets have been driven up so high that private equity investors are faced with the prospect of reselling a business at a lower price.

Multiples for transactions in the luxury sector have hovered in the range of 13 to 15 times earnings before interest, taxes, depreciation and amortization over the past two-and-a-half years, according to EY.

Even struggling companies are fetching prices with multiples of 10 to 12 times annual earnings, noted Ludovic Phalippou, a finance professor at the University of Oxford’s Saïd Business School, who specializes in private equity.

“All indicators show that prices are bound to go down, so it’s tricky for somebody buying a luxury business right now, because selling it in four to five years’ time, it is likely to be sold at a much lower price,” said Phalippou.

The average size of deals is decreasing also as a result of investors seeking more unusual brands and trying to snatch them up before they grow too large and expensive, added Bonacina.

Larger luxury conglomerates will likely concentrate on smaller brands to fill in a special spot in the broader portfolio or secure supplies.

“Perhaps a niche perfume, a hand-crafted product — those small, interesting brands that can appeal to Millennials with an offer of sustainability, traceability, one of a kind, hand-crafted — I think there’s still room for that,” said Gallot-Auberger.

In a recent study on the global M&A market across sectors, EY noted the additional layers of complexity due to geopolitical change and rising nationalism. Driven by the overarching search for growth, however, companies are finding ways to forge ahead with cross-border purchases, it added.

Citing market sources, WWD reported last week that Beirut-based Elie Saab has put out feelers to potential investors. It is understood there has been contact with players in North America and China.

“We’re at a very unique moment with many uncertainties and a great deal of volatility; however, M&A activity will probably continue for a number of different reasons,” said Berry, who saw potential buyers moving in two directions.

“I don’t think the wave is over, but it’s a very binary environment. Some acquirers may prefer to wait while others will continue to be active,” she noted.

The main forces driving future acquisitions fall into four categories, according to Berry: “Search for growth, the search for the new customer — the Millennial, with DNA and tools to connect with them — China, and in certain cases, driven by more defensive moves.”

Berry saw Coach’s purchase of Stuart Weitzman in 2015 and Kate Spade & Co. this year, and Michael Kors’ deal to purchase Jimmy Choo, as falling under the “defensive moves” category, as both companies faced “fundamentally softening core businesses.” She cited Coach’s dependence on department store sales and discounting as well as the “not insignificant” portion of sales generated in outlet malls.

“It is riskier for them to stick with a monobrand strategy, where everything depends on one brand,” Walker noted of the two companies.

Extending brand portfolios reflects consumer trends, as people gravitate toward products at different levels on the luxury scale.

People who buy luxury goods like to “pick and choose, and not just be fond of a single brand and take everything from that particular brand,” added Bonacina, who saw middle-market companies in the sector, along with the high-end, as remaining “of interest” to investors.

Following their recent acquisition sprees, Coach and Michael Kors are widely expected to take at least a year before jumping back into the acquisition arena.

While LVMH and Kering have indicated that they are on the sidelines when it comes to M&A activity for the moment, industry observers note that it is worth keeping an eye on them.

At Kering, the question of activewear brand Puma continues to loom over the company as analysts wonder if it would make more sense for the company to focus on higher-end products. Puma was billed as the pillar of a “sport and lifestyle” pole for the French conglomerate, which has failed to build around it.

“Kering will likely first consider selling Puma and their sports and lifestyle brands before looking for a big acquisition. They own approximately 20 luxury and lifestyle brands and are very nurturing and supportive of their brands. Many of their luxury brands are doing very well. Maybe next year?” wondered Berry.

Jean-François Palus, group managing director of Kering, last month declined to comment on talk of off-loading Puma, saying the group is not contemplating any acquisitions in the near-term.

Among Chinese investors, while some new and sophisticated buyers are becoming more effective, others that talk about making acquisitions “may not be fully up to speed” when if comes to valuation and Western-style auction processes, noted Berry.

Looking further afield, industry experts note that activity in luxury M&A may extend beyond traditional boundaries.

“I would have thought that there should be deals in the technology space,” said Gallot-Auberger, who wondered why luxury companies have not made moves to bring technology in-house.

“Why be dependent on external providers?” she asked.

And perhaps there is room for non-luxury companies to reach into the luxury sphere. As online retailers become increasingly important to the sector, the need for them to have a physical presence has emerged.

“That is bringing more M&A activity, because online is moving toward the off-line and off-line is moving toward the online,” said Bonacina.

Amazon revealed the boundless ambitions of founder and chief executive officer Jeff Bezos by snatching up Whole Foods this year. Plans to sell products from beauty company Violet Grey through its online platform, brought to light by WWD, suggest the company is interested in dabbling in higher-end business.

“Let’s not forget Amazon. Amazon could very much decide to start buying luxury companies,” said Berry.

“It’s not the end of M&A,” predicted Gallot-Auberger, “but rather a different kind of M&A.”

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