Overview of the deal
Initiating firm: Essilor
Approached firm: Luxottica
Estimated value: $54 Bn (including net debt)
Announcement: January 2017
Essilor Advisors: Rothschild, Citi
Luxottica Advisors: Mediobanca
The deal is a merger of equals, meaning that is it is unclear who is the dominant party, and who is to provide the greatest synergies to the new entity. However, the largest shareholder of the combined group will be Leonardo Del Vecchio, the Italian chairman and founder of Luxottica, who is also currently the largest shareholder in the company. As Luxottica has the strongest retail position there is a sense that they and their brands will form the ‘face’ of the new company.
While the deal is not technically a case of vertical integration, Essilor’s R&D spendings are roughly 10,000x greater than Luxottica’s, which only total $24,000. This means that the merger would strengthen Luxottica’s product design process, back-end production and feed into the strong retail brand presence it has. It would also give Luxottica a new revenue stream by integrating Essilor’s optical equipment business.
The FT highlight a statement made by Sagnières claiming that the deal for the rationale lies in developing new innovative products. He also emphasised digitally “connected glasses as a key mission for the combined groups”. Alongside this FT emphasises the potential of a growing eyewear demand, especially in Asia and Africa.
Company details (Luxottica)
Luxottica Group S.p.A (Societa per Azioni) is an Italian eyewear company and is currently the world’s largest by market capitalisation. The company has over 9,000 retail locations with the majority of their turnover originating in North America, Europe and Asia-pacific regions.
- Founded in 1961 and headquartered in Milan, Italy.
- President and CEO: Francesco Milleri (Since Dec 2017)
- Number of employees: 82,200
- Market Cap: $29.3Bn - EV: $28.18 Bn
- LTM Revenue: $9.58 Bn - LTM EBITDA: $2.02 Bn
- LTM EV/Revenue: 2.94x - LTM EV/EBITDA: 13.96x
Company details (Essilor)
Essilor International S.A. is a French lens and optical equipment manufacturer. It has long been a leader in market innovations. It spends over $248M per year on research and development and currently operates 33 manufacturing plants worldwide.
- Founded in 1990 and headquartered in New York City, United States
- CEO: Hubert Sagnière (Since Jan 2012)
- Number of employees: 63,700
- Market Cap: $29.54Bn - EV: $32.64Bn
- LTM Revenue: $9.23Bn - LTM EBITDA: $2.15Bn
- LTM EV/Revenue: 3.54x - LTM EV/EBITDA: 15.21x
Projections and assumptions
The deal will be financed in an all-share style where the aim is to delist all luxottica’s outstanding shares with an exchange being offered of 1 Luxottica share for 0.461 Essilor shares.
The merged company, EssilorLuxottica, will have 140,000 staff, and is forecasted to create an increase in operating profits by up to $720M in the next 3-5 years. This comes from a mix of revenue, and operating, synergies. Overall these synergies will combat the slowing sales growth of both companies, which is due to the recent rise of cheaper rivals with niches in online distribution.
As stated in the overview section of this report, this deal is not technically a case of vertical integration because these two companies do predominantly operate in the same stage of production. However, because Luxottica is more heavily focused on its strong retail oriented product portfolio which includes the likes of the Ray-bans and Persol, and Essilor is focused more so on market innovation and manufacturing, the combined entity will have a streamlined supply chain and manufacturing process:
(Research > Design > Production > Distribution > Retail)
The new entity will aim to exploit forecasted growing demand in the eyewear market. Increased market power of these combined firms, and market growth of 2-4% a year due to an aging global population and increasing education regarding the importance of eye care, provides a favourable market backdrop for the success of EssilorLuxottica. The rationale for seeking revenue synergies will be reflected in a pooling of resources and distributional synergies to streamline their presence as a player in the online eyewear market, after facing increasing competition from low cost online suppliers.
One further way to exploit new market power and complement EssilorLuxottica’s new product portfolio is the legal ability to exercise bundling purchases - forcing opticians to buy Essilor lenses if they want to purchase Luxottica's flagship branded frames - if allowed to operate with this strategy (see next section) we could see upside to revenue synergies. Lastly, despite the clear management succession plan for EssilorLuxottica for the next 3 years, success will depend upon management post this 3 year horizon. Current Luxottica CEO, Francesco Milleri, is a prime candidate as we look for someone with visions aligned with Del Vecchio and who has familiarity with an aspect of the combined entity to further the effort to assimilate operations and long-term vision.
Risks and uncertainties
As is a concern with any ‘merger of equals’, the challenge over management and vision prevails. Despite convincing rhetoric from senior management and prominent shareholders of each firm, there is still uncertainty about the cohesion that will be fostered inside the new entity. Within the new entity Leonardo Del Vecchio, the largest shareholder and Chairman of luxottica, and Hubert Sagnières, the CEO and Chairman of Essilor, will take on the roles CEO and deputy CEO respectively, where they will, despite what their different titles suggest, have the same authority. This could potentially lead to confusion and conflict over which leader’s vision should guide the company, which could spark conflict within management and jeopardise future strategic decision making, potentially constraining revenue growth.
Further, although mitigated slightly by the submission of a succession plan, Del Vecchio’s position at the helm of EssilorLuxottica is causing some concern that once he retires from his position, due to his age, there could be a shift in vision which will disrupt the entity because of a change of course.
Aside from culture clash and general assimilation worries, the largest risk to the success of this merger will be the outcome of the EU probe into the merger. Consolidation in the eyewear industry poses a threat of reducing competition by forcing opticians into bundling purchases - buying essilor lenses if they want to purchase Luxottica's flagship brands for frames. This would be a strong revenue synergy for the combined entity to leverage Luxottica’s strong brand portfolio, and so EU restrictions on this could reduce the revenue synergies available from the merger. The outcome of the EU probe is scheduled to be announced by March 3rd 2018.
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