Luxottica 81-year old founder sets up megamerger with France’s Essilor

Luxottica 81-year old founder sets up megamerger with France’s Essilor

It is often not easy to find the right successor to a dominant founder and so it proved for Luxottica, the Italian owner of two of the world’s best-known sunglasses, Ray-Ban and Oakley

The answer for Luxottica’s 81-year old founder and executive chairman, Leonardo Del Vecchio, has turned out to be a merger with French lens maker Essilor, worth EUR 50 billion after the companies’ shares rose January 16, 2017.

Luxottica’s minority shareholders are paying a small price for this result, but they will gain an end to the governance and strategy problems that have dogged the group.

Luxottica has struggled to stabilize its leadership since its chief executive of 10 years, Andrea Guerra, resigned in 2014 due to differences over his powers and strategy with Mr. Del Vecchio. His replacement lasted a matter of weeks and then one of two new co-chief executives appointed in 2015 stepped down after just a year.

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After the merger with Essilor, Mr. Del Vecchio will become executive chairman and CEO of the larger group, but will share power equally with Hubert Sagnieres, who has run Essilor since 2012 and will take the titles of executive vice chairman and deputy CEO.

The key to this deal will be the relationship between these two. Mr. Del Vecchio has made no commitment to hand over fully at any point. The Luxottica founder’s 62% stake will drop to a 38% share of the combined group when the deal is signed. It will fall further to 31% assuming all Luxottica’s minority shareholders accept the offer of 0.461 new shares in the combined group for each Luxottica share. Their acceptance doesn’t affect whether the deal proceeds.

At Friday’s close, the offer valued Luxottica’s shares at a 5% discount, as noted by Barclays analysts. But both companies surged on Monday eliminating that small discrepancy.

Luxottica shareholders in total will own about 48% of the combined group, based on all shares outstanding, which compares with Luxottica’s contributions of about 57 % of revenues and 54 % of earnings before interest, tax, depreciation and amortization.

The signs look good for the relationship for several reasons. The two companies fit naturally: Luxottica’s expertise is frame design, marketing and retail, while Essilor is one of the world’s leading lens makers.

Both have been moving into each other’s markets and they have held talks on and off about a deal since 2013. They already have a joint venture for Australia and New Zealand.

The deal should give Essilor an advantage over rival lens makers, Hoya and Zeiss. Analysts at Morgan Stanley have highlighted deals like this as a good way for lens makers to protect against price pressures and competition from new technology that can help retailers make their own lenses.

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Shares in Essilor were up 12 % and Luxottica 8 % by lunchtime, putting them in line with the relative valuation in the deal. The small ownership dilution for Luxottica shareholders looks worth it for the succession solution.

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