Pandemic shatters M&A taboo for Italy’s luxury brands

The fashion world has been captivated by its own soap opera this summer as the biggest brands roar back from the pandemic: will legendary designer Giorgio Armani sell up? 

The 87-year-old Italian has long defended the independence of his company even as rival Italian brands such as Fendi and Gucci were swallowed by LVMH and Kering, the ambitious French groups that have grown to dominate the luxury sector. 

But in April, King Giorgio, as he is known, told Vogue that going it alone was “not so strictly necessary” and “one could think of a liaison with an important Italian company”. The invitation to potential bidders did not go unnoticed.

Exor, the holding company of the billionaire Agnelli family that owns stakes in carmakers Stellantis and Ferrari, held talks with Armani, according to people familiar with the matter. The talks, which analysts value at about €7bn, did not lead to an official offer and have finished.

However Armani’s future unfolds, the talks underline how coronavirus is starting to redraw the map in luxury. While the scale enjoyed by LVMH, Kering and Hermès first cushioned the pandemic’s blow before allowing them to rebound strongly, the remaining Italian family-backed fashion groups are taking longer to recover. That has prompted some to consider deals or partnerships that were once taboo. 

A spate of dealmaking in Italy has already begun. Executives and investment bankers believe more will come, although the reshaping of the industry is likely to take several years.

In April Giorgio Armani told Vogue that going it alone was ‘not so strictly necessary’ and ‘one could think of a liaison with an important Italian company’ © Alessandro Garofalo/Reuters

The dangers of going it alone

“The big change is the realisation that some groups are having that being on their own is going to be really challenging,” said Marco De Benedetti, the co-head of private equity firm Carlyle’s European buyout group that has invested in fashion companies including Supreme.

“It’s not just the pandemic. Things are happening much faster and brands have much less time to adjust.”

In July alone, the Ermenegildo Zegna Group, known for its cashmere menswear, said it would go public via a Spac deal that valued it at $3.2bn and signalled it was open to making acquisitions. The Etro family, meanwhile, decided to sell a majority stake in their fashion house to LVMH-backed private equity firm L Catterton in a €500m deal.

If the last month has been frenetic, the starting gun went off in December when Remo Ruffini, the highly regarded boss of puffy coat maker Moncler, unveiled his first big acquisition worth €1.2bn of smaller domestic rival Stone Island, a sportswear brand popular with celebrities such as rapper Drake. 

Long regarded as a takeover target, Ruffini’s move suddenly opened up the possibility that, instead of being the next meal for the likes of Kering, Moncler could instead buy up brands, becoming a bigger Italian force on the global stage.

Roberto Costa, the head of global luxury investment banking at Citigroup, said that Moncler and Stone had set a precedent that other Italian brands would emulate.

LVMH has done more acquisitions than all its smaller rivals combined

“They’ve shown that there is a new path that is different from the old choice of either remaining independent but small, or simply selling to the French,” he added.

While the sector is “generally doing well”, Costa said the growing need for investment in “everything from product, marketing, retail and digital,” would also force change.

“This will lead some groups to look for partners or consider selling in what I call positive consolidation — it’s not that the people who own these businesses have to sell or merge, but they may choose to do so when the conditions suit them,” he added.

With Chinese consumers the industry’s biggest growth engine, having international reach is becoming ever more important. At the same time, the fashion world’s increasing acknowledgment of the need to invest in ecommerce and online marketing favours those groups with the deepest pockets.

An Italian champion to rival the French

Some of Italy’s bigger groups, with annual sales of €1bn or more before the pandemic, will consider their options in the coming years, according to several bankers who know the sector well. Privately held Dolce & Gabbana, and publicly listed Tod’s, Salvatore Ferragamo and Prada, as well as smaller ones like Brunello Cucinelli or Missoni, are among them.

Many Italian luxury brands are still family-owned with the name of the founder on the door. But as younger generations begin to take the reins, independence may not be valued so highly over the benefits that scale can bring.

“The new dynamics that happen when the next generation arrives can also be another variable that leads to change,” said Carlyle’s De Benedetti.

Angela Missoni
Bankers who know the sector well think groups such as Missoni will consider their options in coming years © Estrop/Getty

Those who champion the Italian industry have long dreamt that a multibrand conglomerate would emerge to rival what LVMH, Hermès and Kering have forged in recent decades. Although the window for such empire building is likely to have closed, there are several entrepreneurs in Italy now who are on the lookout for luxury assets. 

First there is Moncler’s Ruffini, who has tripled the group’s sales to €1.6bn in the six years since it went public by tapping into affluent people’s desire for casual yet premium quilted winter coats. Some think Ruffini could take Moncler much further, but he has been coy in public, saying repeatedly that he does not want to do deals just to get bigger, nor to build an Italian cousin to the French luxury conglomerates.

But a person familiar with his thinking said Ruffini wanted to “build a new luxury platform” that would focus on more youthful and edgy brands that could even play in new areas such as tech, gaming and music as much as traditional luxury. However, he wants to prove he can make the Stone deal work first, the person said. 

While the Armani talks have faltered, the Agnelli family had already made a statement of its luxury ambitions when Exor acquired a 24 per cent stake in Christian Louboutin, the French shoemaker known for its towering stiletto with red-lacquered soles, for about €540m. It followed a much smaller investment in Chinese luxury lifestyle label Shang Xia last year.

Exor has also helped Ferrari push into fashion. The sports car maker unveiled its first ready-to-wear collection in June with a physical catwalk show in its hometown of Maranello in northern Italy

Column chart of global personal luxury goods sales (% share) showing top luxury groups are taking share from independents

Whether Exor can convince Armani to follow in Louboutin’s footsteps remains to be seen. Asked whether talks could be revived, an Armani spokesperson said: “We do not wish to speculate or comment on hypotheticals. Suffice to say that the Armani Group has zero financial debt and a cash pile of over €1bn. Not exactly the situation where an external investor is needed.”

Exor said it had “not presented any offer for Armani and is not working on a possible transaction”.

One entrepreneur who has been more open about his ambitions is Renzo Rosso, who since 2002 has built up his privately held OTB group via acquisitions. It now owns brands such as Diesel, Maison Margiela, and recently bought Jil Sander. Rosso told the Financial Times in May that he would “love to” add more brands to his stable if they were a good fit.

Escaping the shadow of the French giants will not be easy for any of these Italian participants. Kering, owner of the Gucci brand and controlled by the billionaire Pinault family, has made no secret of its openness to acquisitions. And LVMH is practically the default buyer in the sector, according to bankers, given the breadth of its portfolio, financial firepower and management talent.

Consolidation down the supply chain

Nor is change afoot only among Italy’s household names. Consolidation has also begun among the country’s fragmented network of textile and leather goods manufacturers who supply top fashion houses.

Some have been snapped up by big companies, such as when Prada and Zegna teamed up in June to buy a cashmere yarn supplier. Financial investors are also circling.

Francesco Trapani, a veteran luxury executive and one-time scion of the Bulgari jewellery dynasty before selling to LVMH in 2011, has embarked on a mission to roll-up small and medium-sized suppliers into a new stronger group. Alongside investors, he founded Gruppo Florence in October to create a “Made in Italy” production platform to serve luxury houses. 

“We have so far bought six companies that are all focused on textile and apparel, and have another three in our sights,” Trapani told the FT. “In the future we want to do the same thing with leather goods, maybe starting next year.” 

“In Italy, there are lots of small suppliers who provide clients with outstanding quality and flexibility, but they have some weaknesses such as access to finance and overreliance on a single entrepreneur. We can help by putting them into a bigger structure with more expertise.”

Choosing between independence and scale is not going to get any easier for Italy’s historic luxury industry.

Additional reporting by Lauren Indvik in London

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