New Wave of M&A Activity Washes over Luxury Goods Market
A major buyout of jewellery brand Bulgari by LVMH Louis Vuitton Moet Hennessy, which valued the brand at 27 times EBITDA earlier this year, is thought to have whet an appetite for M&A among some of the world’s finest brands.
Thomson Reuters data clearly illustrates the trend for M&A within the sector. By the end of May this year, activity worth EUR 4.16 billion had already taken place, compared with M&A activity of a total value of EUR 2.01 billion for the whole of 2010.
The global luxury goods market is expected to see eight per cent growth this year alone, taking it to the value of EUR 180 billion. It’s big business and the Chinese market is crowded with people eager to get their hands on fine jewellery, fashion and handbags, prompting even more growth potential in the East. Bulgari is just one of the many brands that want to target this market.
Although some analysts said the deal between LVMH and Bulgari took place due to a long-standing friendship between LVMH’s Director General, Toni Belloni and Bulgari’s Chief Executive, Francesco Trapani, the latter insists the sale was a simple business decision. “In the last financial crisis, we realised the risk to independent brands is that if they do not have sales of EUR 3 billion or more, they will probably lose the market share,” explained Mr. Trapani, speaking to the FT.
As brands expand into markets beyond Europe, it is difficult, as an independent, to compete with larger companies. And here lies the key to the latest wave of expansions – the potential for massive growth in the Asia market – if your brand has enough profile.
The market for luxury goods is heading for growth of around 20 per cent in Asia and a number of smaller players want to take a slice of these sales. Many of them, however, like Bulgari, are finding they lack the brand power in terms of size, to really capitalize on this growth. Pierre Mallevays, a managing partner of London-based consultancy Savigny Partners LLP, explained that China is now a “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".
“There’s a virtuous circle of success that the big brands have [in Asia] and it only increased the value creation gap [with the smaller brands],” he added.
Interestingly, many of the smaller firms faced with the decision whether to do a deal with larger competitors are also family-run organisations with proud histories of independence. Some are unwilling to sell and are turning to IPOs to raise the cash they need for expansion. However, many of these traditionally family-run businesses have found themselves in the situation where no family members are directly managing the company, and it is these brands that are vulnerable to takeovers.
Potential buyers will no doubt be keeping an eye on the Swiss watch market as regulatory changes are set to abandon rules that require Swatch Group to make parts for smaller competitors. Faced with the prospect of huge investment in R&D and manufacturing, many smaller watch brands could be looking to sell.
Although some may do so reluctantly, analysts believe it is these smaller brands that have the potential to really reap the benefits of the new Asian growth. John Guy, an analyst at Royal Bank of Scotland Group, told the Business Standard, “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 a big opportunity to grow size and scale relative to peers.”
