Vice-President: Leonardo Bassino, Henry Wareing
Analysts: Lili Jing, Sia Jain, Royce Pan, Shagun Shrivastava, Victor Zheng
Deal Overview
Acquirer: Kering
Acquiree: Valentino
Deal Size: $1.87 bn
Buy Side Advisors: Centerview Partners
Sell Side Advisors: Rothschild & Co. and Intesa Sanpaolo
Luxury French brand Kering is buying a 30% stake in Italian fashion label Valentino from the Qatari investment fund Mayhoola for 1.7 bn euros ($1.87 bn) in cash after lower-than-expected Gucci sales. The agreement also includes an option for Kering to purchase the whole of Valentino's share capital up until 2028. The 30% stake purchase is on its way to be completed before the end of the year. The French group is striving to reduce its reliance on Gucci which has been losing steam in recent years and failed to keep pace with the post-pandemic rebound of rivals such as Louis Vuitton which is owned by Europe’s most valuable company LVMH.
Kering
A global Luxury group, Kering manages the development of a series of renowned Houses in Fashion, Leather Goods and Jewelry: Gucci, Saint Laurent, Bottega Veneta, Balenciaga, Alexander McQueen, Brioni, Boucheron, Pomellato, DoDo, Qeelin, Ginori 1735 as well as Kering Eyewear and Kering Beauté. By placing creativity at the heart of its strategy, Kering enables its Houses to set new limits in terms of their creative expression while crafting tomorrow’s Luxury in a sustainable and responsible way. We capture these beliefs in our signature: “Empowering Imagination”. In 2022, Kering had over 47,000 employees and revenue of €20.4 bn. The current deal is part of a broader strategic partnership between Kering and Mayhoola, which could lead to Mayhoola becoming a shareholder in Kering.
Valentino
Maison Valentino is synonymous with inclusiveness, uniqueness and creativity; a leading Italian institution in the fashion and luxury sector. The company, with its signature DNA, is a landmark of Made in Italy on the international scene, the most established Italian Maison de Couture with presence in Couture, Prêt-à-porter, Bags, Shoes and Accessories collections, and in activities with licensed partners in Valentino Eyewear and Valentino Beauty. Jacopo Venturini, CEO from June 2020, and Pierpaolo Piccioli, sole Creative Director from 2016 are re-signifying the iconic codes leveraging Valentino’s unrivalled brand heritage in the modern world. Maison Valentino is present in 162 locations through a strategic distribution network, which involves boutiques located in key shopping locations around the world and around 1000 points of sale. Founded in 1960 by Valentino Garavani and Giancarlo Giammetti, Valentino S.p.A. has been controlled by Mayhoola for Investments LLC since 2012. Valentino has 211 directly operated stores and booked revenue of 1.4 bn euros in 2022.
Mayhoola
Mayhoola Lux S.à.r.l. (“Mayhoola”) is an investment entity directly controlled by Qatari Mayhoola for Investments LLC. Mayhoola’s strategy focuses on global investments in the luxury industry with a long-term investment approach. Current portfolio includes an impressive stable of luxury top-of-mind fashion houses: the Italian Maison de Couture Valentino, French luxury house Balmain and Italian Pal Zileri. Mayhoola also owns the leading Turkish luxury department stores Beymen.
Industry Analysis
The global luxury goods market is anticipated to grow from $284.0 bn in 2023 to $392.4 bn by 2030, at a CAGR of 4.7% during the forecast period. The US, China, and Japan are projected to be the three biggest markets for luxury goods in 2023 with a market size of $75.7bn, $53.6bn and $30.5bn respectively. The market is dominated by a few major players, including LVMH, Kering, and Richemont. The growth in the sector is expected to be driven by digitisation, an increasingly wealthy population and an inclination towards sustainability.
Figure 1: Value (€bn) of global luxury market segments by type, 2022
While Kering's North American retail revenue fell 23% in the second quarter, their larger rival LVMH reported a 21% rise in sales of its fashion and leather goods division, home to Dior and Louis Vuitton. On January 26, LVMH announced its sales and net profit highs for 2022, driven by strong local demand in Europe, the US and Japan and the resumption of international travel.
The acquisition of Valentino would give Kering a strong foothold in the high-end women's wear market. The deal would also help Kering to diversify its revenue streams and reduce its reliance on its other brands. The transaction is likely to have a number of implications for the industry, including stronger consolidation, higher prices, and increased competition.
Cutbacks in discretionary spending and the uncertain economic climate triggered by the COVID-19 pandemic, Brexit, US-China trade war, and the Russia-Ukraine war negatively negatively affected aggregate demand. Despite that, the resurgence in Chinese and American spending, and the increasing dominance of millennials and youth and the strength of the online channel have led to a strong revival in the luxury market. This trend is expected to continue over the medium to long-term. Asia is expected to witness the highest spending, riding the crest of China’s resurgence, followed by Europe, North America, Australia and Oceania, Africa and South America.
The deal is a sign of the strength of the luxury goods market. Despite the economic challenges of recent years, the luxury market has continued to grow. This is due to the increasing affluence of consumers in emerging markets, such as China and India. The deal is also a sign of the growing importance of digital channels for luxury brands. Valentino has been a leader in the use of digital marketing and e-commerce. Kering is likely to help Valentino to further develop its digital capabilities.
The deal, hot on the heels of Kering’s acquisition of high-end perfumer Creed, highlights the return of big-ticket M&A activity in the sector as luxury groups look to diversify sources of revenue against an uncertain economic background and slowing demand.
Deal Rationale
Kering's recent acquisition of a 30% stake in Valentino is driven by a compelling strategic rationale which is poised to create substantial value and enhance Kering's competitive position within the luxury fashion industry.
Revenue synergies
Kering’s strategic move in acquiring Valentino is a clear example of Kering's track record of orchestrating highly successful reboots for prominent brands like Saint Laurent, Gucci, Balenciaga, and Bottega Veneta. It is not merely an investment but rather a thoughtful assimilation of two entities known for their distinct approaches to brand elevation. This partnership serves as a seamless complement to Valentino's ongoing brand elevation strategy, which has been led by Valentino's CEO, Jacopo Venturini. Kering can further help improve its performance and gain from it.
This partnership focuses on tapping into the arena of collective expertise and resources to elevate Valentino to unprecedented heights. This synergy is grounded in Kering's proven ability to orchestrate ultra-coherent communication, collections and store concepts that allow brands to transcend their traditional boundaries and expectations. Its recognition of Valentino's transformation under the ownership of Mayhoola, turning it into one of the most admired luxury houses on a global scale, underscores the strategic coherence of this deal.
François-Henri Pinault, the Chairman and CEO of Kering, echoes this sentiment by expressing his delight in Mayhoola's choice of Kering as a partner to develop Valentino further. This recognition is rooted in Valentino's deep-rooted association with beauty and elegance, making it a natural fit within Kering's esteemed portfolio. Moreover, Kering's leverage of Valentino's iconic brand name opens up new vistas for market expansion into uncharted territories. With Valentino's solid brand presence in Europe and Asia, Kering can strategically introduce new Valentino outlets in key global cities and seamlessly integrate Valentino products into its existing distribution channels. The potential for increased sales is substantial, and the positive impact on both companies' revenue streams is evident.
The complementary customer base between Kering's brands, including household names like Gucci, Saint Laurent, and Valentino presents an auspicious cross-selling opportunity. This strategy not only has the potential to enhance the average purchase value among customers but also amplifies revenue generation. The brilliance of cross-branding doesn't merely lie in its financial implications; it intricately weaves a tapestry of enriched customer experiences, bolstering brand loyalty and affinity.
Furthermore, collaborative product development is a salient feature of this partnership. Kering and Valentino can harness their combined creative energies to conceive innovative offerings that resonate with a broader spectrum of consumers. A captivating example is the possibility of a collaborative line of handbags that seamlessly amalgamate the distinctive design aesthetics of both brands. This shared creative endeavour promises not only a boost in sales but also the potential to redefine industry trends and set new benchmarks for luxury.
Lastly, this alliance takes place in the backdrop of a thriving luxury accessories market, which has demonstrated exceptional resilience even amidst the challenges of rising inflation. Forecasts indicate that luxury is poised to be the fastest-growing price segment within the expansive global apparel market. The anticipated growth trajectory is remarkable, projecting a potential rise from 9.2% in 2022 to a commanding 11.4% by 2027. Against this backdrop, the strategic partnership between two huge fashion houses, Kering and Valentino emerges as an opportune synergy poised to harness the tremendous potential presented by this segment's growth.
To summarise, Kering's strategic acquisition of a stake in Valentino extends beyond a conventional business deal. It signifies a harmonious convergence of brand expertise, market insights, and a shared commitment to excellence.
Cost synergies
In the realm of strategic collaborations, the union between Kering and Valentino emerges as a beacon of cost synergies, a strategic fusion designed to maximise resource utilisation and operational efficiency. This symbiotic partnership draws its inspiration from a multi-faceted approach to cost optimisation, where the convergence of their strengths and resources generates a landscape of strategic advantage.
Unfolding within this alliance is the potential to leverage Valentino's manufacturing capabilities, an avenue that Kering can deftly utilise to curtail its own production costs. With a network of manufacturing facilities spanning Italy and other countries, Valentino's manufacturing power stands as a strategic pillar. Kering's visionary strategy involves the integration of these facilities to craft its products, signalling a conscious commitment to reducing production costs without compromising on product excellence.
This collaboration resonates with Mayhoola's foresight, a vision that goes beyond immediate monetary gains. While Mayhoola's shareholders are financially secure, the strategic implications of aligning with a larger brand comes to the fore in an industry marked by rapid consolidation. This collaboration brings together real estate dynamics, talent strategies, supply chain optimisation, media acquisition and digital tools, forming a constellation of avenues that could speed up growth and increase profits. Central to this partnership is the pursuit of economies of scale, a strategy that could reshape costs in various areas. Marketing, distribution, IT, HR, and sourcing are all poised for positive changes through shared resources between Kering and Valentino. Joint marketing campaigns and store openings are key elements that are expected to lead to cost savings. This synergy offers the benefit of smarter investments and improved profitability overall.
A distinctive feature in this synergy narrative is the potential for collective negotiations with suppliers, a feat enabled by the combined might of Kering and Valentino. This collective clout translates into favourable terms when sourcing materials and components in bulk, effectively materialising reductions in the costs associated with raw materials and component procurement. The strategic symmetry in their pursuit of operational excellence is evident in their shared focus on IT infrastructure and software licences, a collaborative endeavour that promises tangible cost efficiencies.
François-Henri Pinault, the guiding force behind Kering, characterises the Valentino stake as a "first step" in Kering's larger partnership with Mayhoola; he hints at a broader narrative that stretches beyond immediate horizons. Balmain, standing at the cusp of potential, could stand to gain from this collaboration, should both parties opt for closer integration. As the contours of this partnership evolve, the emergence of Mayhoola as a potential investor in Kering gains prominence, especially if Kering's control over Valentino deepens. The potential mechanism of a share swap emerges as a strategic method through which this transformation could lead to huge cost synergies.
To summarise, this collaboration is designed to optimise resource allocation, streamline operational efficiency and nurture profitability.
Risks
While Kering's acquisition of a 30% stake in Valentino holds significant potential benefits, it does not come without risks. Regulatory scrutiny stands as a potential obstacle, as the European Commission is common to intervene in luxury fashion industry mergers to prevent anti-competitive outcomes. Kering must proactively engage with relevant authorities, emphasising the deal's advantages and addressing concerns to secure necessary approvals.
Financially, there is a risk of earnings dilution. Kering's premium payment for a minority Valentino stake might impact short-term earnings. Despite this, Kering asserts that long-term gains will outweigh initial costs. Integration challenges loom as another potential risk, arising from differing corporate cultures and management approaches. Meticulous management of the integration process will be crucial to ensure success. Structural changes within Kering, including management reshuffling to rejuvenate Gucci and reducing direct involvement in Saint Laurent, further emphasise the intricate landscape of this deal.
The deal's transformative potential notwithstanding, it is important to recognise its limitations. While granting access to an iconic luxury brand, the stake acquisition won't drastically alter Kering's market position or challenge LVMH's dominance. The market's response has been somewhat subdued, reflecting both the potential and the challenges inherent in this collaboration. Despite past stellar growth, Gucci's recent performance lags behind competitors like LVMH and Hermes in the post-pandemic rebound. In this context, Valentino's influence might be limited and could face its own challenges.
Moreover, the cyclical nature of the luxury fashion industry introduces market downturn risk, potentially affecting both brands. Valentino's struggle to align haute couture excellence with its broader business adds another layer of uncertainty. In light of these factors, Kering's stock showed a marginal decline, highlighting the market's cautious optimism. Ultimately, while Kering's strategic vision remains steadfast, these intertwined risks underscore the complexity of the luxury fashion landscape and the multifaceted considerations that shape transformative acquisitions like this one.
Comparable Companies analysis
Precedent Transactions Analysis
Moncler SpA acquisition of a 30.0% stake in Sportswear Company SpA
The deal, first announced in December 2020, has given Moncler the entire share capital of Stone Island and its parent Sportswear Company S.p.A. The final 30% of the purchase is worth around €345m ($419m). Per an agreement between Moncler and Stone Island, the Italian sportswear brand was valued at €1.15bn ($1.4bn).
PFC Srl and Zignano Holdings SpA acquisition of a 7.2% stake in Hugo Boss
On February 10, 2015, Italy's Marzotto family completed the purchase of a 7.24% stake, otherwise 5mn shares, in luxury goods firm Hugo Boss through their holding companies Zignago Holding SpA and PFC Srl, the firms said in a statement on Tuesday. The deal was supported by €150m ($169m) financing arranged by Italian investment bank Mediobanca.
DeVa Finance Srl acquisition of a 25.5% stake in TOD’S SpA
On August 3, 2022, DeVa Finance made an offer to buy a 25.54% share in TOD'S S.p.A. for about €340m, or €40 per share. The Della Valle family, through its holding companies, would have owned 90% of the business, with LVMH keeping the remaining 10%. The promotion expired on October 25, 2022, having started on September 26, 2022. In addition to serving as financial advisers, BNP Paribas, Crédit Agricole Corporate Investment Bank, and Deutsche Bank are financing the offer. In the transaction, Milan of Lazard served as TOD's board of directors' financial advisor.
DeVa Finance cancelled the acquisition of TOD'S S.p.A. on October 25, 2022.
Aeffe SpA acquisition of a 30.0% stake in Moschino SpA
San Giovanni in Marignano Aeffe S.p.A., listed on the STAR segment of Borsa Italiana and involved in the prêt-à-porter market under well-known brand names like Alberta Ferretti, Philosophy di Lorenzo Serafini, Moschino, and Pollini, acquired on July 28, 2021, a 30% shareholding in Moschino S.p.A. from Sinv Holding S.p.A., Sinv Real Estate S.p.A., and Sinv Lab S.r.l. Following the transaction, Aeffe owned 100% of the acquired company.
Fine Mito Srl acquisition of a 26.6% stake in Cover 50 SpA
On April 19, 2023, Fine Mito S.r.l. made a tender offer for a 25.64% stake in manufacturer and distributor of apparel products, Cover 50 S.p.A., for €15.2m on April 20, 2023. The equivalent price per share was €13.5
D and D International acquisition of a 20.3% stake in S.T. Dupont SpA
On October 20, 2021, D and D International B.V. made a €14.9m offer to acquire the remaining 20.3% of S.T. Dupont S.A., equivalent to a per share implied price of €0.14
Conclusion
The acquisition of a 30% share in Valentino by Kering is an exemplary case of strategic transaction that goes beyond short-term financial rewards, reflecting a careful blending of innovation, synergy, and risk management. This collaboration highlights Kering’s dedication to portfolio diversification, and at the same signals the acquirer’s commitment to leveraging the strength of its brands, carefully selecting the ones that are able to maintain a solid customer base thanks to their unicity. The rationale behind the deal, which considers well-defined cost and revenue synergies, addresses improved client experiences, enhanced operational efficiency, and market expansion. As Kering positions itself to be a major player in the upscale womenswear market, the partnership with Valentino opens new opportunities for the creation of unique and successful products.
However, this ambitious project does come with a level of risk. While Valentino is suppositionally a great addition to Kering’s portfolio of carefully selected brands, regulatory scrutiny, potential earnings dilution, integration problems, and the cyclicality of the luxury apparel industry all pose threats to the financial success of the deal. Indeed, careful and wise management will be a key component required to guarantee smooth integration and a successful hedging strategy against market risks. Despite the difficulties, Kering's innovative vision and the industry's tenacity signals that this partnership is well-positioned to take advantage of the luxury goods market's ongoing expansion and development.
References
https://www.voguebusiness.com/fashion/kering-to-acquire-30-of-valentino.
https://www.retail-insight-network.com/news/kering-valentino-acquisition-mayhoola/.
https://www.ft.com/content/8bcc67b8-4d21-414f-9731-f971f83c099a
https://www.reuters.com/markets/deals/kering-takes-30-stake-italian-luxury-brand-valentino
https://www.fortunebusinessinsights.com/luxury-goods-market-103866
https://www.statista.com/study/61582/luxury-goods-in-depth-market-analysis/
https://www.reuters.com/article/hugo-boss-stake-marzotto-idUSI6N0UV01M20150210/
https://www.businessoffashion.com/news/retail/moncler-acquires-the-remaining-30-of-stone-island/