MILAN — The landscape of the Italian fashion industry is changing by the day — literally.
A day after Etro revealed it had agreed to sell a majority stake to L Catterton, the Ermenegildo Zegna Group said it expects to publicly list on the New York Stock Exchange by the end of the year in an deal that is expected to give the fashion group a market capitalization of $2.5 billion. To this end, the Italian men’s wear giant has entered into a business agreement with Investindustrial Acquisition Corp., a Special Purpose Acquisition Corporation, or SPAC, sponsored by investment subsidiaries of Investindustrial VII LP.
While the deal will allow Zegna to further expand globally and continue to build its manufacturing pipeline through acquisitions, chief executive officer Gildo Zegna, who will retain his role and add that of chairman of the company, on Monday morning firmly waved away any idea of building a fashion conglomerate. “This is an industrial project, not a financial one,” he said.
Pointing to Italy’s manufacturing prowess, “where 70 percent of ready-to-wear brands” are produced, he reiterated his goal is “to control the supply chain, become stronger and integrate brands within our own culture and DNA and remain competitive.”
Andrea C. Bonomi, founder of Investindustrial and chairman of the Industrial Advisory Board, admitted building a conglomerate “is a current story,” but he said Zegna “will not form an agglomeration of brands because size counts. It plans to build the Zegna brand and have a family of companies that have the Zegna DNA, the Zegna way of doing things, which is more coherent with Italy rather than a conglomerate of Italian brands, which would not fit with this particular project. Zegna will grow by acquisitions of like-minded businesses as it’s not [seeking] opportunistic [acquisitions].”
The closing of the transaction is expected to occur in the fourth quarter of this year and the Zegna family will continue to control the company with a stake of about 62 percent. Investindustrial will have an 11 percent stake and 27 percent would be free floating. Based on the transaction value, the merged entity will have an anticipated initial enterprise value of $3.2 billion.
The transaction is expected to deliver approximately $880 million of gross proceeds, consisting of IIAC’s $403 million cash held in trust, a fully committed $250 million private investment in public equity, upsized by $50 million in light of strong investor demand, and about $225 million in a purchase agreement with Strategic Holding Group Sàrl, an independently managed investment subsidiary of Investindustrial VII LP and subject to a lockup of up to three years.
Sergio Ermotti, chairman of Investindustrial Acquisition Corp., said the SPAC was created for this type of transaction, to list “a well-managed company with strong fundamentals and growth potential like Zegna, supporting the champions of Made in Italy with their growth ambitions. This is a perfect and virtuous example of how a SPAC creates value, with speed, ease of execution and minimum disruption in the long term.”
He underscored Zegna’s “heritage and sustainability at its core for more than a century, a vertically integrated luxury laboratory with full control of the value chain for highest excellence and a global group that was a pioneer in China, with a relevant part of the sales derived from that market, which is a natural platform for growth.” He also touted the success of the Thom Browne acquisition made in 2018, which since then has doubled its sales.
“With Zegna we identified a group that includes both a strong family heritage and a leading position in sustainability, one of the pillars in Investindustrial’s investment strategy,” said founder Andrea C. Bonomi, who is also chairman of the Industrial Advisory Board. He touted Investindustrial’s long-term commitment to expand and grow the Zegna company around the world. Investindustrial is not new to the luxury world and last month sold the Sergio Rossi brand to Fosun Fashion Group.
Ermotti and Bonomi will join the Zegna board, which comprises the likes of Angelica Cheung, Michele Norsa, Domenico De Sole and Ron Johnson, among others.
Zegna explained that Ermotti approached the family and there never was any competition with another SPAC or stock exchange. “We took advantage of this [offer], we could have stayed private for another 100 years, but the timing is perfect,” he contended. “The luxury business is very challenging and we will create new opportunities with the backing of such a supporting partner — we hope Bonomi will stay on forever.”
Bonomi said the Zegna company “would gain visibility through a listing in the U.S., which will remain a key market. We are not taking away from the Italian market. Zegna is a global company and the U.S. is the right place [for its IPO].”
Zegna dismissed any talk of succession. “The family is very united, nothing will change, we will stick to the way we were before and the deal was fully approved, also by the fourth generation unanimously.”
Zegna underscored the family company’s “very clear strategy. The first growth will be organic. There are so many things to push, we have a big project by the end of the year conceived before the IPO.” He said “many marketing resources will go into that transition of moving the perception of the brand from clothing to a luxury casual brand, and this needs a lot of support.”
There about 32 family members, but only some of them are active in the company, who, in addition to Gildo, are his sisters Anna and Benedetta; his two sons Edoardo and Angelo, chief marketing and sustainability officer, and head of retail and merchandising in the U.S., respectively; his cousin Paolo, and nephew Francesco Trabaldo.
Armando Branchini, executive chairman at InterCorporate, praised the Zegnas for their strong leadership skills and innovation, seeing this project as “opportune and important. They are not selling to cash out and go fishing, and they are not raising a white flag, giving up. This is the continuation of the entrepreneurial culture of the family, based on discipline, using capital in a very rigorous way, and it shows courage, as it allows the market to judge the company’s performance. Also, listing in the U.S. shows entrepreneurial maturity, they know the reputation of the brand is very strong there, and this is a strong signal toward retailers and consumers.”
In addition, the listing will attract management talents. “A part of the family will need to become good shareholders, rather than good managers,” said Branchini.
On the other hand, two luxury analysts who requested anonymity wondered if a public listing was the best option, as it will put pressure on the company each quarter — especially now that the men’s formalwear segment is challenged. But both agreed it could be a way to overcome the generational changes any family-owned company eventually faces.
Another analyst said he believed the listing in New York would help Zegna see higher valuations and underscored how it would help attract new talent.
“The SPAC is offering speed and certainty of execution,” said Ermotti. “The Zegnas are not selling a part of the company but finding a partner from an industrial point of view.”
“They understand this is not a money-making or quick fix. The family has a long-term goal for the next 100 years, and this is also long-term for us,” echoed Bonomi, who declined to provide the name of the high-profile investors, underscoring they were also long-lead. He said the private investment in public equity had been oversubscribed very quickly. “If you know where you come from and where you go, the SPAC market is a good market.”
Among the goals going forward, Zegna is aware the company’s “digital [operations] can do much better,” while Thom Browne is “ahead of the pack.” He trumpeted the Italian company’s luxury textile platform, “unique in the industry,” envisioning additional opportunities. He cited the acquisition last month of cashmere firm Filati Biagioli Modesto SpA in an agreement with Prada. “There is clear evidence knitwear is the next booming sector.”
He underscored that Zegna will “not be going into women’s wear, this is a very important statement. Thom Browne is flying in women’s. We see organic growth, strengthening our supply chain of specialized niches and protecting Italian know-how.”
Thom Browne “came along when we were thinking of an acquisition,” said Zegna, who would see buying another brand only “if it fits with our culture and can be integrated within our structure. We have a lot of paper on our desk, but there is nothing now, it has to be another Thom Browne.”
The Zegna brand has expanded into the luxury leisurewear segment, growing this category from 38 percent of sales in 2016 to more than 50 percent in 2021.
Sustainability was a key topic as the CEO pointed out the company was the first in luxury to produce sustainable and recycled fabrics from waste material from the mill and that the fresh funds will help it continue on this path. Bonomi said ESG is very important to private equity firms in general and to Investindustrial in particular.
“This [Zegna] is an extraordinary company both in terms of the environment and at the governance level, which will be very important as a public company. It is world class, with no evolution required. Women are already 60 percent [of employees], with three world class women on the board, who are key in every decision. We bring governance to the companies and in this case we learn from Zegna.”
The company has no debt, said Bonomi, who noted that the Zegnas “under-promise and overachieve,” as people are known to be in Piedmont, the region they hail from.
Zegna was “very positive about 2022,” saying he already saw better results this year than expected, close to 2019 results “because of a healthy diet.” In 2019, the company reported sales of just above 1.3 billion euros. The manufacturing plants were partially able to run by producing medical gowns and protective masks last year.
Zegna admitted 2020 “has to be remembered as the most challenging in my 40 years [at the company], but also the most rewarding of my life. In my silence I was able to protect the structure and the business. This project came at the right time, with a very lean and very fast-moving company. In a way I tried to turn the negative and sadness, loneliness of COVID-19 into a positive angle, and I must say that the team reacted in a fantastic way and bravely to the new challenge.”
He said he had cut operating expenses by 20 percent, which had “never happened in the history of the company,” as well as capital expenditures, but “not in China. It’s a market that unless you keep your foot flat on the accelerator you go backward. We never stopped as we did not in 2008 and 2009 during the Lehman [Brothers] crisis.”
In 1991, Zegna was the first luxury men’s wear brand to open in China, and Greater China accounted for 35 percent of the company’s apparel, accessories and textile revenues in 2019.
As of Dec. 31, the group had a presence in 80 countries through 296 directly operated stores.
Additional resources from the IPO will strengthen capital expenditures and marketing. “You will see a very, very healthy and ambitious Zegna in 2022, we can meet any challenge in the luxury market. We are the only luxury men’s brand and we want to consolidate our leadership,” the CEO said.
Zegna spoke fondly of America, his “school,” where he worked in the ‘80s, and he was upbeat about gaining further exposure and brand awareness in the U.S.
He saw the silver lining of a “dreadful 2020” for department stores and at retail in America, as now, after cutting orders, they are coming back with reorders and there will be a turnaround, which requires exposure, he observed. Mentioning his own relaxed look during the Zoom call — a light blue shirt under a deconstructed blue jacket — he said he was pointing buyers into “this direction, not a formal look.”
“America is a country of relationships, it’s the first thing I learned 40 years ago: if you build a relationship, it will be forever,” said Zegna, who now feels “rewarded, capitalizing on this” through “a fantastic deal with Nordstrom,” for example, where all 15 of Zegna’s stores within Nordstrom will become concessions. Wholesale, which accounts for around one-third of revenues, remains key, especially in the U.S. and Europe, he said.
“We want America to be stronger, we are strengthening our position in America and we are going to make it. We will keep investing and we are here for the future,” he said.
He admitted the Asia Pacific’s “on-and-off lockdowns” are penalizing business, and he expressed concerns about Indonesia and Australia. “The pandemic is not over, in that part of the world in particular. We are very strong in China, but we have to strengthen Korea, Japan and South East Asia, there’s room for improvement there, there’s interest for our brand.”
Incidentally, he emphasized the growing importance of Dubai, the fastest-growing market for Zegna after China. “It’s the most international hub, which used to be Hong Kong and New York but not anymore. Our store in the Dubai Mall is our number-one store in the world, with an average of 25 different nationalities buying there every day, excluding the Chinese. It’s unbelievable, it’s an incredible testing platform. If you are smart you can find niches outside China and the U.S. and our new resources will strengthen that possibility to do new business with new projects.”
These included the opening of pop-up shops. “We have a very high loyalty factor among customers, because we do care and we know what clienteling is about. We have an incredible staff — service is so important in men’s wear — but we are working to capture new customers.”
Zegna said the brand’s made-to-measure segment — not only formal but also casualwear — accounts for 10 percent of sales. “Without our supply chain this would not be possible,” he said.
This is why he underscored organic growth. “You understand what I have on the plate, it’s just a matter of setting priorities, focus on a few countries and just do it.”
Ermenegildo Zegna Group was advised by UBS Investment Bank and Sullivan & Cromwell. Deutsche Bank, Goldman Sachs Bank Europe, SE – Succursale Italiana, JP Morgan Securities Plc and Mediobanca acted as financial advisers to Investindustrial Acquisition Corp. Chiomenti and Kirkland & Ellis acted as legal advisers to Investindustrial Acquisition Corp.