TO GO OR NOT TO GO? ITALIAN FASHION HOUSES WEIGH THE IPO OPTION
Byline: Sara Gay Forden
MILAN — Going public.
It’s been dubbed the “second revolution” of Italian fashion, as the industry wags its collective tongue about the hottest trend since the return of the power suit. And investment bankers are lining up with dollar signs in their eyes.
Underneath all the excitement, some designers have come to that sobering realization that they won’t live forever. There’s also the envy factor: Designers have watched some of their competitors make millions — in some cases, hundreds of millions. To top it all off, an expanding global market is demanding more and more capital.
In fact, Milan’s buzz this season is all about who’s going public, getting ready to, or even thinking about it — rather than who’s going long or short or sheer.
“There are now two benchmarks for success: If Gucci and Bulgari hadn’t gone public with extremely high valuations, there would be a lot more hesitation now,” said Dante Razzano, chief executive officer of merchant bank Deutsche Morgan Grenfell in Milan.
The big IPO everybody is waiting for is that of Versace, which is going ahead with plans to seek a listing despite the designer’s tragic death in July. On July 10 in New York, just five days before he was murdered, Versace signed a mandate for Morgan Stanley to take the house public. The house is considering listings on the New York and Milan stock markets, although specifics haven’t been decided and the initial target date of next July will probably be pushed back due to the designer’s death.
Santo Versace, president, has said the target date will probably be pushed back at least nine months. Although a spokesman declined to confirm figures, the placement value of the house of Versace has been estimated at a whopping $1.4 billion (2.4 trillion lire), or roughly 32.4 times 1996 net consolidated profit of $42.8 million (73.9 billion lire), though some analysts believe the value could reach as high as $1.7 billion (3 trillion lire).
Giorgio Armani, Gianfranco Ferre, Nicola Trussardi and Nino Cerruti have all admitted they are thinking about public listings in one form or another, while Valentino, after giving a mandate to Goldman Sachs last year to study future options, including potential financial partners or an IPO, apparently discarded the idea of an IPO and signed a letter of intent last month to be acquired by Fiat Group’s HPI, which also controls designer apparel maker GFT and is already quoted on the Milan bourse. The deal would also give Valentino and partner Giancarlo Giammetti a minority stake in HPI.
“It is unthinkable, on the eve of the year 2000, that a sector as extraordinary as the fashion business…could be managed without substantive alliances that guarantee important synergies,” said Giammetti when the deal, which is still pending, was announced.
“Versace’s murder made all these guys feel human,” said Russell Sternlicht, a principal with U.S. investment bank Montgomery Securities, which is currently working with the house of Ferre on preparations for a listing. “A lot of these designers are aging without heirs. They are starting to plan for the future of their businesses,” Sternlicht said.
Time will tell if the current bustle around the stock market will really push a significant number of Italian fashion houses to make the quantum leap from being private to public companies.
“These designers are living in a cozy world,” said Paul Gordon, an equities analyst specializing in luxury goods companies with IMI-Sigeco in Milan. “Do they really want to be crawled all over by men in suits asking them tricky questions?”
Regardless of whether the Italian designers are ready to bare their chests and tell all, one thing is clear: After years of exponential growth, they have hit a new threshold and are taking a serious look at the structure of their businesses and their own future prospects. They’re cleaning house and whipping their companies into shape like never before.
“The fashion sector has reached a critical point: the confrontation with the global market,” said Pino Brusone, managing director for Giorgio Armani SpA, during a recent interview. “And that means, grow bigger or disappear,” Brusone said.
“It isn’t enough anymore just to have a name. You have to have financial muscle and industrial power on your side as well,” Brusone added, saying that Armani is studying the possibility of a stock market listing and plans to decide by the end of the year.
“For us it isn’t so much an issue of needing funds to grow with; we can grow with the cash flow we generate,” explained Brusone. “For Armani, it is more an issue of continuity, it’s a question of age. The time is coming when we can’t put off certain decisions anymore.”
In the meantime, as reported, the house is streamlining its operations into four major divisions: creative, industrial, retail and licensing/royalties.
“In all these years, we have grown fast and frenetically, opening new companies as we opened stores. We built a lot in a short amount of time, and now we need to put things in order,” Brusone said.
A look at the numbers behind these companies shows why the investment community is eager to get in on a piece of the action — particularly the merchant banks that manage the public offerings. No one has forgotten that Investcorp netted a whopping $1.7 billion from taking Gucci public two years ago. (Investcorp’s total intake was $2.1 billion before paying off underwriting costs and Gucci’s debts for $364.3 million.)
Financial analysts estimate that these companies are being valued at anywhere from 32 to 36 times net profit, though a more prudent calculation considers the average net profit of the past three to five years. Another thumbnail estimate is 15 times EBITDA or Earnings Before Interest, Taxes, Depreciation and Amortization.
There is also the question of whether fashion makes a good investment. Certainly, the businesses have reached dimensions few of today’s top designers could have imagined when they founded their companies.
Industry leader Giorgio Armani’s business grew 24.5 percent last year, with consolidated net sales hitting $690 million, and net profit climbing 7.5 percent to $104 million.
Ferre, Trussardi and Cerruti have also managed to build hundreds of millions of dollars in volume for their respective companies, through wholesaling retailing and licensing.
“Some fashion companies are going to make good investments, and some aren’t,” said Deutsche Morgan Grenfell’s Razzano. “It depends on how much you believe in their growth potential.
“If the creative process is too closely tied to an individual, it raises a question about the ability to continue that creativity beyond the person,” Razzano said. “There is also the issue of the diversification of products, which gives more value and potential for growth,” said Razzano, who pointed to Ralph Lauren’s ability to create a classic style that has contributed to the continuity of the business and produced high profit margins.
“Armani, for example, has created a similar situation, of course with an Italian flair and eye to quality,” Razzano said.
Leading the next group of Italian companies onto the public forum will be the jeans and sportswear manufacturer Ittierre, the group that produces Versace Jeans Couture, Versus, D&G, Dolce and Gabbana Jeans, Gianfranco Ferre Jeans and its own line, Exte. Ittierre, which is based in the southern Italian town of Isernia, is set to debut on the Milan stock market in the middle of next month with a 25 percent float.
“The era of the single designer unto his own is over,” said Ittierre managing director Giancarlo DiRisio. “Up to now, Italian fashion houses have been able to grow with their existing, almost familial structures,” DiRisio said. “Now they have to get organized and become real companies, or it’s over.”
DiRisio stressed that going public isn’t a step to be taken lightly. He has been preparing for Ittierre’s listing, with the help of U.S. investment bank Morgan Stanley, for three years. “It takes a lot of time and work. It shouldn’t be considered a fashionable thing,” he said.
Gianfranco Ferre, who is relaunching his business with new vim and vigor since winding up his eight-year stint at Christian Dior last July, has also instituted a complete company restructuring with the goal of a Wall Street listing by the end of 1999.
“Going public doesn’t mean taking the personality away from the company,” said Ferre’s partner and managing director, Gianfranco Mattioli during a recent interview. “But it means giving continuity, transparency and a new organizational mentality to the company,” Mattioli said. “The era of spontaneous growth due to the talents of one or two people is over. Now it is time to consolidate, to channel creativity.”
As reported, Ferre is planning to acquire the Bologna-based production company owned by Mattioli, which produces the first women’s line, into the parent company. The house is streamlining its corporate organization, slimming down from 21 different companies to six, and beefing up its staff in the financial, marketing and distribution areas.
“Our intention is to debut with a well-organized company,” said Mattioli. “For us, the stock market is the point of departure, not the end of the journey, and once we’re there, we want to stay there,” he said.
Trussardi is also making moves toward the stock market by merging his jeans and sportswear manufacturer, Sosab, into Manifatture Rotondi, formerly a real estate investment company that will be transformed into Rotondi Evolution and given a new mandate in the apparel sector. The first phase of the project involves opening some 100 stores under the T-Store name, primarily in Asia, with merchandise from the Trussardi Sport and Trussardi Jeans collections. In the future, Trussardi said, Rotondi Evolution could be the vehicle to bring other divisions onto the stock market.
Changes in the distribution end of the business are also a major factor forcing fashion companies to seek fresh capital from the stock market.
“With the development of emerging markets in the Far East, Eastern Europe and South America, and the importance of making significant investments in stores around the world that are large enough to express brand identity, massive resources are necessary,” Trussardi pointed out. “Department stores and multibrand shops aren’t enough by themselves to get the message across to the consumer,” he added.
Sternlicht of Montgomery Securities added that department stores are also pushing manufacturers to invest more money in service, delivery and inventory. “The consolidation at the department store level in the U.S. is forcing the hands of the designers and apparel manufacturers to raise capital,” said Sternlicht.
“As the department stores make more and more demands, many manufacturers are opening their own stores to regain control over distribution,” Sternlicht noted. “As the big guys grow bigger, the little guys are seeking access to capital and clout they must have to compete,” he added.
The good news for companies contemplating the stock market today is that they have several models of how — and how not — to do things.
“If a company wants to go public and do it right, there are two things that are fundamental,” said Francesco Trapani, ceo of Bulgari, which debuted on the Milan stock market in the summer of 1995.
“The first is to convince the investor that you have a clear, credible strategy that will bring growth. Once you’re public, you can’t improvise from one day to the next,” Trapani said. “The second is to have a strong and motivated management team that can take those strategies and execute them efficiently.
“Donna Karan is now doing what they should have done in the first place: putting the management and strategy into place,” Trapani said.
While a public offering can bring huge financial returns and other benefits in terms of visibility and image, the rewards don’t come cheaply. One who knows this well is Gucci ceo Domenico De Sole, who dedicates significant amounts of his own time and that of his staff to explaining Gucci’s strategy to financial analysts.
“You can’t hide behind anything,” said a drained De Sole after a three-hour teleconference answering questions from some 300 stock market analysts the day Gucci announced its first half results last week.
“It’s a brutal effort,” De Sole said after the Gucci stock took a pounding after a negative second-half outlook overshadowed a strong first-half performance.
“Is it worth it? Yes, but if you want to go public in the U.S., you had better be ready. Everybody wants to look at the ups, and nobody wants to look at the downs,” De Sole said.
“There is also a tremendous pressure to continue to perform and grow,” De Sole continued. “You have to be in constant search of how you are going to grow your business, and in the luxury goods sector, you also have to keep in mind the long-term best interests of the brand.”
According to Paul Gordon, of Milan’s IMI-Sigeco, “the challenge is to marry the financial and creative cultures as best you can.” He said, “It’s a difficult balance to get and always a bit of a risk. Of course, there have to be financial controls — but not at the cost of creativity.”