By guest author Stephen Wilmot from Wall Street Journal
The USD 2.4 billion Michael Kors is reportedly splurging on Versace looks like a bad use of shareholder funds
Versace fits nicely with Michael Kors’s strategy of creating a multibrand, global fashion group. That may be the problem: If you make clear you want a deal, you do not get a good one.
Michael Kors is close to paying EUR 2 billion (USD 2.4 billion) for Versace, The Wall Street Journal reported on September 24, 2018. The Italian fashion brand is best known for glamorous, sometimes provocative designs and the tragic assassination of its founder, Gianni Versace, in Miami Beach in 1997.
It would be a move upscale for Michael Kors, a brand known for so-called affordable luxury. The company was a stock-market darling for a couple of years after its initial public offering in 2011 as it took market share from established rival Coach. Then Kate Spade became the hot new label and Michael Kors went the way of Coach, prompting a strategic rethink.
Last year Michael Kors bought shoe brand Jimmy Choo for USD 1.2 billion, and chief executive John Idol talked about more big acquisitions to forge a “global fashion luxury group.” His template seemed to be the big Parisian luxury conglomerates LVMH Moët Hennessy Louis Vuitton SE and Gucci-owner Kering , which own more than a dozen brands each and have been growing faster than U.S. competitors. Coach also wants to diversify: Last year the company bought Kate Spade and changed its name to Tapestry to portray itself as a holding company.
Michael Kors is reportedly paying roughly three times sales for Versace, which is barely profitable. Michael Kors stock itself commands just over two times sales. Mr. Idol risks destroying shareholder value by absorbing Versace into a holding company known for affordable luxury, which may be why the shares fell 9 % on Monday morning.
Versace has fallen on hard times. In 2014 the family, led by Gianni Versace’s sister Donatella, brought in private equity group Blackstone to fund an expansion. Rumours of an IPO have surfaced periodically since, but the company failed to get in the luxury revival that other European brands have experienced since mid-2016, making the IPO pitch awkward. Kering was among the potential buyers that thought Versace was too expensive, according to a Reuters report.
Michael Kors also faces the tough task of reviving Versace at a time when its own revival is fragile. Neil Saunders, managing director of consulting firm GlobalData Retail, says a recent improvement in sales has been driven by “an upswing in U.S. consumer sentiment and spending, rather than because the brand is generating much better traction.”
Mr. Idol has his work cut out convincing investors he is not wasting their money.