By
with contributions from Luisa Zargani
 on September 24, 2018
Michael Kors, John IdolMichael Kors Access party, Spring Summer 2017, New York Fashion Week, USA - 11 Sep 2016

Michael Kors Holdings Ltd. is adding some Italian flair.

Sources confirmed Kors is close to buying Versace for about 2 billion euros, a deal that is expected to close this week. The Versace family will maintain a role in the company, the sources said, although it could not immediately be learned what will be the exact nature of their involvement.

Kors buying Versace confirms a report in WWD today that the Italian fashion house was in talks about being acquired, with the American brand being among the names seen as a possibility.

The stock market didn’t react well to reports of an impending deal, with Kors shares trading at $66.11 at 11 a.m., down 9 percent.

Versace is run by Donatella Versace, creative director, and her brother Santo Versace, chairman, who own 20 percent and 30 percent of the firm, respectively. According to sources, the private equity firm Blackstone, which owns 20 percent of Versace, is planning to sell its stake in the deal.The remainder of the company is owned by Allegra Versace Beck, Donatella’s daughter and the niece of the house’s late founder, Gianni Versace.

The company posted revenue of 686 million euros in 2016 and returned to profitability in 2017.

The potential Versace acquisition will bring Michael Kors a step closer to becoming a luxury fashion group. Last year, Kors acquired the Jimmy Choo business for $1.2 billion.

It was learned that Michael Kors organization would do the acquisition themselves. Silas Chou and Lawrence Stroll, former investors in the Kors business, are not involved in this deal, sources said.

Sources believe Kors will build up the accessories portion of the Versace brand, similar to what they’ve done with the Kors and Jimmy Choo brand.

A Kors deal will bring to an end what has been feverish pursuit of the brand over the last few months. According to one source, Donatella Versace herself made overtures to potential investors since the spring, rather than pursue a formal process via investment banks.

It is understood that Kering was among the first to submit an offer a few hundred million euros shy of 2 billion euros. Such a big number extinguished interest from most potential strategic buyers, including Tapestry, save for Kors, which pulled out a bigger checkbook and pursued exclusive negotiations in recent weeks, the source said.

John D. Idol, chief executive officer of Kors, has made no secret of his desire to build the firm’s portfolio, and he has said publicly that he is on the hunt for more acquisitions. The company sees itself as a global luxury company. Its latest acquisition was the $1.2 billion deal for the Jimmy Choo brand in 2017. Adding Versace to the Kors umbrella would fit perfectly with the push to intensify its focus on high-end luxury.

At the time of the Choo deal, Idol said, “We are creating a global luxury fashion group. Our focus is on international fashion luxury that are industry leaders.” The executive noted that having the two together under one umbrella helps the firm diversify from a brand and product standpoint, as well as geographically with greater exposure in Asia and Europe. A Kors U.S. spokeswoman declined comment.

Neil Saunders, managing director of GlobalData Retail, in New York, finds Kors’ decision to acquire Versace an interesting move, considering Kors’ desire to become a luxury goods house, but said the benefits of the potential deal could take years.

“That Michael Kors should court Versace is no great surprise. The American company has long desired to transform itself into a house of luxury brands, a process it started with last year’s acquisition of Jimmy Choo. Versace comes with a much bigger price tag of $2.35 billion, almost double the $1.2 billion price that Michael Kors paid for Jimmy Choo. However, it would also put a big-hitting brand with true global status into Michael Kors’ stable,” said Saunders.

“Other than the desire to become a bigger conglomerate, the rationale for buying another luxury label is perhaps less sound. In our view, while progress has been made, Michael Kors has not rebuilt its core brand to the same extent as other players like Coach: its offer is still confused and is nowhere near as rounded nor polished as many other luxury players. This shows up in the company’s sales figures where growth has been driven by an upswing in U.S. consumer sentiment and spending, rather than because the brand is generating much better traction.”

He said that over the past few quarters, two things have helped push the group onto more solid ground. “The first of these has been the sales contribution from Jimmy Choo, which has flattered sales growth numbers. The second has been a rebuilding of margins which has helped push up profit. In our opinion, these dynamics have given Michael Kors the confidence to look to new corporate deals in order to fuel future growth,” he said. “The choice of Versace is interesting. If the deal goes through it would certainly push the group into the big league in terms of its profile in the luxury space. It also means that the company would be a player in many different categories from fragrance to home to pets, thereby giving the group a true lifestyle position. However, it is also the case that despite its profile, Versace has struggled to grow sales. As such, Michael Kors is not buying a perfectly performing brand, it is buying a brand that needs work and some repositioning.”

He believes that Kors’ past experience with its own brand will help it make the changes that are required, but these shifts will cause short-term disruption, and that the true benefits might take a few years. “We also believe that some of the work required on Versace, which includes toning down some of the brasher elements of the brand which are now out of step with the more subtle tone preferred by modern consumers, are precisely the issues with which Michael Kors has struggled and is yet to satisfactorily resolve,” said Saunders.

“Ultimately, we view this deal as an additive one. While it is true that the enlarged group would be able to make savings on central costs, we don’t see the addition of a brand like Versace being about helping to boost the Michael Kors brand, other than perhaps through a more extensive global supply and distribution chain. It is much more a play to give the group a more rounded and defensible proposition that has a number of brands to drive performance across different parts of the market,” he said.

 

 

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