Financial markets, not trends, stir buzz at Milan Fashion Week

Surprisingly, the talk among analysts and designers at Milan Fashion Week is on the next big thing in acquisitions and initial public offerings as change sweeps the industry.

Ferragamo chose to sell shares to the public. Bloomberg News

The men's spring-summer 2012 spectacular in Milan this week may be the first fashion season where clothing and accessories are the last things on people's minds.

As PPR hunts assets, Prada and Salvatore Ferragamo court investors for initial public offerings (IPO) and a French investment firm snaps up Moncler, the chatter in Milan is of who will be next to list or being bought out.

Corneliani, a luxury suit-maker, kicked off the four-day Milan Fashion Week in the Italian city at the weekend.

Potential acquisition targets include Burberry, Mulberry and Tiffany, says John Guy, an analyst at Royal Bank of Scotland (RBS) in London.

LVMH's €4.3 billion (Dh22.6bn) purchase of the jeweller Bulgari, based in Rome, may spark a wave of consolidation as some companies seek to narrow the gap with their larger peers.

"Expect more mergers and acquisitions and IPOs," says Armando Branchini, the vice chairman of InterCorporate, a consulting company in Milan specialising in luxury goods. "When the favourable winds blow, all the sailors hoist their sails."

A lack of scale or expertise limits smaller companies' ability to build brand recognition and tap demand in Asia and may lead some to seek alternative paths to growth.

"China is a kind of winner-takes-all market where the bigger the brand, the better known you are, the more infrastructure you have on the ground and the more people want you," says Pierre Mallevays, the managing partner of Savigny Partners, an advisory company specialising in luxury goods in Milan.

"There's a virtuous circle of success that the big brands have there and it has only increased the value creation gap [with smaller brands]."

Spending on high-end brand names may rise 8 per cent this year to €185bn, excluding currency swings, according to the consultant Bain & Co.

Luxury sales in mainland China, which does not include Hong Kong, Macau or Taiwan, may surge 25 per cent to €11.5bn on the same basis, keeping it the fastest-growing market.

Last week, Unicredit said in a report the big brands, including LVMH, based in Paris, offered the most attractive valuations amid expected positive earnings momentum.

Plans to sell shares may be put on hold until stock markets rebound.

Moncler, a maker of US$1,000 (Dh3,670) ski jackets, scrapped an IPO in Milan because of market weakness and opted to sell a stake to Eurazeo, a French investment company.

When the moment is right, "Burberry is the obvious candidate" for a takeover and would fit nicely in the portfolio of Richemont, a Swiss luxury goods holding company, which includes Dunhill and Chloe, Mr Guy says.

Burberry, which gets about 30 per cent of sales in the Asia-Pacific region, appeals to consumers there because of its craftsmanship and "Made in England" heritage, even though it has fewer stores than peers in the region.

"That makes Burberry very attractive to a much larger player," says Mr Guy. "Mulberry also has enormous potential."

PPR, which is selling retail businesses to focus on luxury, sports and lifestyle, is targeting mid-sized companies with high-growth potential.

"The interest in luxury companies by established investors and new ones from Asia is forcing up valuations, which is potentially a sign of strong activity to come," says Mr Mallevays. LVMH paid a 60 per cent premium to snag Bulgari, the world's third-largest jeweller. Including debt, that was a multiple of 28.2 times earnings before interest, taxes, depreciation and amortisation, more than LVMH had paid for any other company.

PPR, which owns Gucci and Balenciaga, may have to also pay up or risk losing out in its bid to add to its watch and jewellery portfolio.

"Interesting luxury targets are usually family controlled," says Francois-Henri Pinault, the chief executive of PPR.

Many owners of companies he may be interested in, including the watchmaker Patek Philippe, aim to stay independent, says Victoria Lee, an analysts at Barclays Capital.

That may change amid Swiss regulatory changes. Swatch will from next year cut component deliveries as it seeks to end a regulatory requirement that it sell such parts to rivals.

If that happens, the financial burden of investing in their own research and development and manufacturing capabilities may force some smaller companies to sell.

Independent companies wishing to remain so may pursue IPOs as a path to fundraising instead. Ferragamo, the Italian luxury shoemaker, spurned suitors, both private equity and competitors, in favour of selling shares to the public, said Ferruccio Ferragamo, the company's chairman last week. Ferragamo is set to start trading in Milan on June 29.

Rivals will be watching the success of both Ferragamo, whose shoes have been worn by actresses Marilyn Monroe and Jennifer Lopez over the company's 84-year history, and Prada, which is said to have raised about $2.1bn in a Hong Kong IPO after the company sold shares at the low end of its price range amid a global market slump.

Prada shares will start trading on Friday.

At the low end of the price range, Prada is valued at about 23 times estimated earnings while LVMH trades at about 18.55 times. PPR is valued at about 13.5 times.

Most deals involving medium-sized companies that lack the financial or human resources to tap growth in China, will be with investors who have expertise and contacts in the region to help manage the "rocketing" costs for employees and retail space.

The Ferragamo family in March sold an 8 per cent stake in the company to the Hong Kong businessman Peter Woo and agreed to raise its stakes in distributors based in China, Hong Kong, Taiwan and Macau.

How long potential targets stay independent may be partly a question of price, says Mr Guy.

"Luxury-goods stocks have had a phenomenal run since the financial downturn, but ultimately there is more to go for if you're a smaller player and you've still got big opportunities to grow size and scale relative to peers," he says.

* Bloomberg News