Consolidation in the luxury industry: acquisition of Versace by Michael Kors

Authors: Alessandro Babbaro, Riccardo Lizzi

Michael Kors Holdings Limited announced the acquisition of Versace for $2.12bn, on September 25th. Upon completion of the deal, which is expected to be during Q4 2019, the group will rebrand as Capri Holdings with combined annual revenues of $6bn. This deal follows the £896m acquisition of Jimmy Choo, dated one year ago. The American company is trying to create a US rival to conglomerates such as LVMH and Kering.

Companies overview

Michael Kors, formally known as Michael Kors Holdings Limited, is a global fashion brand founded in 1981 with executive offices in London and operational headquarters in New York. The company sells accessories, footwear, and apparel with a presence in more than 100 countries.

Michael Kors went public in December 2011, raising $944m through the sale of 47.2 million shares. Through the IPO, the company reached a market value of $1.18bn. Seven years later, the market capitalization climbed to $8.7bn, with the shares trading at $57, as of November 6th. During FY 2018 (ended in March 2018), the company generated $4.71bn Sales Revenue, showing a 5% increase from the previous year. In terms of profitability, the company reported a $592.1m Net Income, which represents a 7.4% increase from FY 2017.

Versace is an Italian luxury fashion company founded by in 1978 by Gianni Versace in Milan as Gianni Versace Spa. The Versace family retains 80% of the ownership, with the remaining 20% held by Blackstone since 2014. The American PE Fund is expected to exit this investment with a €156m capital gain.

Upon completion of the deal, the Versace family will retain a €150m equity stake in the combined entity. According to The Financial Times, the company in 2017 generated $680m in revenues and roughly $15m in profits. Revenues are expected to climb to $850m next year. Versace, as opposed to Michael Kors, generates the majority of its revenues from the clothing business line. This transaction comes after Versace had delayed its plans to launch an IPO due to unfavorable market conditions. Indeed, in January, the CEO told Reuters that they were in “no rush” to list on the stock market.

Industry overview

The structure of the luxury fashion retail industry is not going to change significantly, but recent notable mergers & acquisitions have further shaped the industry landscape since certain brands are looking for opportunities to expand. The reasons behind the willingness of luxury fashion houses to expand are attributable to several factors. Firstly, it is important to mention the disruption brought by the e-commerce, which has greatly affected the bottom lines of brick-and-mortar stores. As more and more consumers are buying online, as it is possible to see from the graph below, retail sales have declined. In fact, there has been a noticeable decrease in the number of consumers willing to buy in shopping centers and department stores in North America.

MK 1

Another reason that has created a shift toward mergers and acquisitions is the change in consumer preferences. Until a few years ago, customers gravitated more towards luxury brands that fell in the middle range in terms of price and style, which are also referred to as “middle market luxury brands”. Now, consumers are going toward the opposite ends of the spectrum and seem to be split into two groups, one that is loyal to high-end luxury brands and another that prefers more affordable fashion retailers. Some high-end luxury brands are using M&A to fight changing environmental factors in the industry for years, by merging into “luxury brand super groups” or a “family of brands”. LVMH, one of the largest luxury brand conglomerates in the world, is composed of 70 brands with reach in six different industries, ranging from fashion and leather goods to wines and spirits. Even though consolidation in the luxury retail sector will likely increase, some heritage brands, such as Chanel and Hermès, are resisting the trend of M&A. One reason why heritage luxury brands would resist attempts to be taken over is that these brands have historically been associated with their founding fashion designers. In relation to this deal, Mr. John Idol, Chairman and CEO at Michael Kors, said the Versace brand had been “terribly under-developed” and that Capri would invest in 100 new stores as well as take ownership and invest in its own factory base to control production. Michael Kors is seeking to become a “luxury brand supergroup”, like LVMH and others, and for this reason Versace can take the opportunity of this acquisitions in order to develop synergies with Michael Kors and expand in Europe, Korea and Japan. The latter is a market that represents hundreds of millions of dollars a year in sales for Michael Kors, while Versace brand has not penetrated the market yet.

Deal rationale

Michael Kors has taken an additional step towards becoming a luxury conglomerate with the acquisitions of Jimmy Choo first and then Versace.  This move will make the company compete with the likes of LVMH and Kering.

Michael Kors believes that this transaction represents an opportunity to reach the long-term goal of $8 billion in sales. In addition, the deal diversifies the geographic presence of the group with forecasted sales in Americas representing 57% (from 66%), Europe 23% (from 24%) and Asia 11% (from 19%). Japan, for instance, represents a real opportunity for the group as the CEO of Michael Kors said that Versace’s business was insignificant in that area. Michael Kors has a strong presence in the Americas while Versace next year is expected to generate 46% of sales from Asia. As reported by Erinn E. Murphy, a managing director and senior research analyst at Piper Jaffray covering global fashion and lifestyle brands, there is room to grow in the American market for the Italian fashion brand. Interestingly, Versace generates $58 per follower while Michael Kors a much higher $357 per follower. As part of the $8bn goal the company expects Versace’s sales to climb to $2bn (2.5 times current level), increase the number of stores globally from 200 to 300, focus on online and omnichannel sales, and accessories and footwear to represent 60% of revenues. In terms of the long-term revenue breakdown by brand, Michael Kors would generate c. 62.5% of them, followed by Versace at c.25% and Jimmy Choo at c.12.5%.

Deal Structure

It was reported on the 24th of November 2018 that Michael Kors Holdings may acquire Versace in a deal valued at €2bn, and an official announcement could be made during that week. Just one day after, on the 25th of November, the US luxury group announced that has reached an agreement to acquire Versace at an enterprise value of €1.83bn. Michael Kors has acquired Versace, the luxury fashion designer clothing manufacturer from GiVi Holding SpA, which holds an 80% stake in the target, and The Blackstone Group LP which holds the remaining 20%. The cash for the deal will be financed from the acquirer’s cash resources, existing bank facilities, new bank facilities from J.P. Morgan and Barclays. Michael Kors will also pay €150m in Capri Holdings Ltd shares, which will be the acquirer’s new name upon completion of the acquisition. Based on Michael Kors closing share price of $66.71 on 24th September, it can be calculated that approximately 2,649,378 shares will be sold. Based on the acquirer’s 149,321,694 shares outstanding, the consideration shares represent a stake of 1.774% in Michael Kors. GiVi Holding will retain a minority stake in Versace. The deal is expected to be completed during the 4th quarter of 2018. Upon closing, Michael Kors will start trading under the name Capri Holdings Ltd and it will have a combined annual sales of $6bn. A value that Mr. John Idol hopes to bolster 33% to $8bn across the three brands, according to his recent presentation to investors. Donatella Versace together with her brother Santo and daughter Allegra own 80% of the fashion house, they will retain a €150m equity stake as part of the deal. The remaining 20 percent is owned by the US private equity firm Blackstone that is selling its holding. Mr. Idol did not rule out other acquisitions but he said that there could be a “seamless integration” of Versace, they want to invest a great amount of money into the family-owned ”Milanese” fashion house. In conclusion, this is a crucial deal in the luxury industry and Versace family’s decision to sell follows disposals by other long fiercely guarded independent brands. Donatella Versace pointed out that as shareholders in the newly renamed Capri, the family remains committed to the business also thanks to the structure of the deal where GiVi Holding will retain a minority stake.

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