MARZOTTO AND VALENTINO TEAM UP AT LAST — BUT WHAT COMES NOW?

Byline: Luisa Zargani / With contributions from Alessandra Ilari

MILAN — Marzotto clearly hopes it can do better with Valentino than HdP.
After seemingly endless speculation, Marzotto announced Wednesday the purchase of Valentino from Holding di Partecipazioni Industriali for $210 million, a sum that includes Valentino’s net debt of $179.2 million. (Dollar figures are converted from euros at current exchange rates.)
It also brings HdP another step closer to divesting its fashion interests to concentrate on its editorial and communication operations, said Maurizio Romiti, chief executive officer of HdP, in a statement.
“The purchase of Valentino allows us to strengthen our presence in the worlds of luxury goods and retailing,” said Antonio Favrin, vice president and ceo of Marzotto, in a statement. “Valentino perfectly blends with Marzotto’s portfolio, which include Hugo Boss and the licenses Marlboro Classic, Gianfranco Ferre Studio and M Missoni,” said Favrin.
HdP bought Valentino in 1998 for about $233 million in what was billed as the start of a fashion conglomerate. But the big group never materialized. HdP’s other fashion holdings include Fila, Joseph Abboud and GFT Net, which once held licenses for such key brands as Giorgio Armani Collezioni and Emanuel by Emanuel Ungaro. Those licenses, however, were taken back in-house by their owners.
Marzotto downplayed the possible financial effects of the acquisition, expecting a surplus value from the sale of nonstrategic activities.
“Marzotto believes it will drastically improve Valentino’s financial results and bring profitability to the company by 2004,” said the Marzotto statement.
The deal must gain approval by the Italian equivalent of the Securities and Exchange Commission on antitrust issues.
In 2001, Valentino registered sales of $115.7 million, with a gross margin of $72.3 million and a net loss of $24.9 million. Marzotto said it will not increase its capital and will not modify its dividend strategy as a consequence of the acquisition.
“This is a great deal and very balanced, because there are synergies between the two companies,” said Armando Branchini, vice president of InterCorporate, a luxury goods analyst here. “They have the same management philosophy, they are both projected on international markets, they are solid companies with corporate structures,” said Branchini.
Analysts and fashion sources concur that the Valentino brand is strong, but that Marzotto will need to invest heavily in retailing and production if it is to succeed where HdP failed. “This is an interesting operation and Valentino is complementary to Hugo Boss, but the challenging relaunch of the label and the impact of the investments in the short term could be painful for Marzotto,” said Andrea Paladini, a luxury goods analyst at Centrosim. “The $210 million figure, added to Marzotto’s own debt of $367.3 million on a company property of $589.2 million equals a debt-to-equity ratio less than one.”
“In terms of strategies, and in the long term, this is an important and positive acquisition for Marzotto,” echoed Paola Durante, luxury goods analyst at Merrill Lynch. “In the medium term, I am worried about the fact that Marzotto has never managed a luxury brand and that perhaps it does not realize how much money needs to be invested in the company. If Valentino is indeed brought to break-even in 2004, it means Marzotto did not invest enough.
Durante added that she expects Marzotto to focus on management and defining the relationship with Valentino Garavani.
Life after HdP for the designer is indeed an issue for most industry insiders. Sources often reported that HdP treated Valentino and his business partner, Giancarlo Giammetti, to lavish fringe benefits, which included personal planes, free vacations, bodyguards and a $5 million yearly consulting contract. It was these benefits that Marzotto apparently was not willing to take up — and which delayed the signing of the contract. According to sources, however, Valentino was still not happy with the way his business was handled by HdP and, although he had no say in the sale, many speculate he is now breathing a sigh of relief.
Valentino’s contract with HdP expires in 2003. Sources say that if he were to break the contract with Marzotto before then, he would have to cough up a hefty sum. Not that it seems likely, given his fame for being passionate about his work and his stated intention that he’s still not ready to retire.
“Valentino deeply loves his metier and wants to redeem his brand,” said Maurizio Pecoraro, who prior to dedicating himself to his eponymous line, designed the Valentino Roma line. “GFT [the company that manufactured the line, also owned by HdP] was a productive failure and did not have a skilled workforce. The workers in the production plant only knew how to make very structured garments that were old-looking and out of touch.”
The designer said Valentino’s runway collections, on the other hand, were beautiful because they were assembled in Valentino’s couture palazzo in Rome.
“Marzotto is not the ideal partner because it’s a more industrialized company and is less familiar with luxury, but there is nothing worse than HdP,” said Pecoraro.
Conversely, Carlo Pambianco, owner of a luxury goods consulting firm, believes Marzotto’s industrial and culture makes it the “ideal partner” for Valentino. “HdP had a financial background that did not help grow Valentino,” said Pambianco, who holds a positive view of Marzotto’s financial strategy. “Marzotto is known for its caution. I’m sure it has studied a solution to Valentino’s problems and it has the capacity to relaunch the label, along the lines of what Gucci did with Yves Saint Laurent.”
Recent industry talk was that Valentino could be split into two separate divisions, for ready-to-wear and couture, with Valentino designing the latter, following the YSL model. A spokesman for Marzotto said it was too early to discuss details of the transaction. Valentino Garavani was not available for comment at press time.
“I don’t think the idea of splitting the divisions would work,” said one designer, who spoke on condition of anonymity. “Besides, Valentino won’t let go and is still very passionate about his profession. Marzotto will be better than HdP, which wanted to create a luxury pole on the model of LVMH Moet Hennessy Louis Vuitton without a background to do so and wanted a quick return. Valentino is one of the few great Italian designers and he has built a huge brand, but GFT has an Eighties mentality, believing it’s good enough to have a recognized designer name, and did not invest in a modern technical know-how.
The designer said Marzotto needs to understand that Valentino is a luxury brand and must not be turned into a purely commercial one. As for the fringe benefits, the source said Marzotto can’t afford to keep them if it wants to turn the brand around.
“Everyone is cutting costs,” said the designer.

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