New shopping habits may help Gucci’s Owner

Reports that Kering has held deal talks with Moncler would be a major change of strategy for the luxury group

By guest author Carol Ryan from Wall Street Journal

If Louis Vuitton is about to pair up with Tiffany, what should Gucci do? A big acquisition by the Italian brand’s owner could be a helpful shift in strategy.

On December 5, 2019, shares in luxury skiwear company Moncler rose 8 % following a Bloomberg report that it had been approached by Kering, which owns Gucci, Saint Laurent and other brands. Moncler said its Chairman and leading shareholder, Remo Ruffini, had discussed strategic opportunities with other luxury companies, including Kering, but that there was “no concrete hypothesis under consideration.” Kering recently said it is open to, but does not need, a new deal.

A model presents a creation for Gucci during the 2019 Gucci Cruise fashion show. Captpion courtesy by Wall Street Journal

With a market value of EUR 68 billion (USD 75 billion), Kering would need a sizable deal to meaningfully boost sales and profit. As Tiffany has sold to LVMH, only Moncler and Burberry are now realistic targets, given their scale and free floats. Other brands are privately held or controlled by family founders.

Based on Wednesday’s undisturbed share price, Moncler’s equity would be worth around EUR 13 billion, including a 30 % takeover premium. Factor in roughly EUR 450 million of net cash and the all-in price represents 18 times expected earnings before interest, taxes, depreciation and amortization—high in comparison to recent luxury deals.

Such a large acquisition would be out of character for Kering, which has not bought anything since it took on small luxury watchmaker Ulysse Nardin in 2014. Instead, management has focused on growing existing brands in the portfolio, like Saint Laurent. This strategy has generated huge returns for its shareholders over the past three years.

But, a more sizable deal might make sense now. “It takes a decade to build a EUR 1 billion brand. To take a brand from EUR 1.5-2.5 billion in sales takes less time,” says Mario Ortelli of M&A advisory company Ortelli & Co. Kering could have around EUR 15.6 billion to spend if it took on borrowings worth three times forecast 2020 Ebitda. Another EUR 1.6 billion is to hand were it to sell its 16 % stake in German sportswear brand Puma.

The French company may feel pressure to shop more aggressively following LVMH Moët Hennessy Louis Vuitton’s USD 16.2 billion purchase of U.S. jeweller Tiffany & Co last month. Digital technology is making scale more important in the luxury industry.

Importantly, a big new label would make Kering less reliant on Gucci. Next year, the flagship brand is expected to generate 77 % of Kering’s total operating profit, FactSet data shows. Buying Moncler, which is unusually lucrative for an apparel brand, would reduce Gucci’s contribution to 70%, based on the EUR 560 million of operating profit that Moncler is expected to make next year. The drawback of Moncler’s profitability is that there is little room for improvement.

Kering could continue to scale up its own brands. But, only a major shopping spree will help it to keep up with LVMH.