By Felix Bachetta (Wharton School) and Masem Abbas (UCL) - Date: 12/01/2019
Overview of the deal
Acquirer: LVMH
Target: Belmond
Estimated value: $3.2bn
Announcement date: 14th December 2018
Acquirer Advisor: Undisclosed
Target Advisor: Undisclosed
LVMH, world’s largest luxury group by revenue, announced a $3.2 billion acquisition of luxury hotel and travel company Belmond in December 2018, effectively valuing Belmond’s equity at $2.6 billion, at a price of $25 a share. The deal is expected to be completed in the first half of 2019, subject to approval from shareholders and regulators. The acquisition will grant LVMH control of 46 hotels, restaurants and luxury trains and cruises across 24 countries. LVMH, which owns brands such as Christian Dior and Louis Vuitton, saw off interest from several other potential bidders for the deal, including sovereign-wealth funds and buyout firms.
Acquiring the high-end hotel chain will grant LVMH access to a wide portfolio of luxury experience hotels, such as Hotel Cipriani in Venice and Le Manoir aux Quat’Saisons in Oxfordshire, adding to the French conglomerate’s lodging portfolio, currently comprising of the Cheval Blanc hotel chain and the Bulgari Hotels and Resorts. By pursuing this acquisition, LVMH hopes to benefit from the rising trend of experiential luxury, where consumers are shifting their preferences from purchasing luxury goods to seeking high-end experiences, be it through the consumption of gastronomy and wine, or by traveling.
Belmond delivers unique experiences to discerning travellers and owns a number of exceptional assets in the most desirable locations. This acquisition will significantly increase LVMH’s presence in the ultimate hospitality world. -Bernard Arnault, CEO of LVMH.
Company details (LVMH)
LVMH Moët Hennessy Louis Vuitton S.E. is a luxury products company. The company operates several business divisions including Wines and Spirits; Fashion and Leather Goods; Perfumes and Cosmetics; Watches and Jewelry; Selective Retailing. Some of its brands include Moët & Chandon, Dom Pérignon, Louis Vuitton, Marc Jacobs, Céline and Givenchy.
-Founded in 1923, headquarters: Paris, France
-Chairman & CEO: Bernand Arnault
-Number of employees: 128,637
-Market Cap: $127.216bn -EV: $156.458bn
-LTM Revenue: $50.419bn -LTM EBITDA: $12.330bn
-LTM EV/Revenue: x3.10 -LTM EV/EBITDA: x12.69
Company details (Belmond)
Belmond Ltd. is a hospitality and travel company operating and owning 46 hotel properties, river cruises, safaris, rail trips and restaurants throughout the entire world. Hotels account for an overwhelming majority of Belmond’s business, exceeding 80% of total revenue in fiscal 2018.
-Founded in 1976, headquarters: London, United Kingdom
-President & CEO: Roeland Vos
-Number of employees: 128,637
-Market Cap: $2.58bn -EV: $3.71bn
-LTM Revenue: $571.8mn -LTM EBITDA: $65.9mn
-LTM EV/Revenue: 6.31 -LTM EV/EBITDA: 54.77
Projections and Assumptions
Short term Consequences
LVMH investors reacted negatively to the news of the acquisition, as the French conglomerate’s shares fell by 1.3%. The transaction was valued at x22 EBITDA, a multiple roughly twice as high as recent comparable transactions in the luxury space, with the sole exception of the similarly highly valued Michael Kors acquisition of Versace. Meanwhile Belmond’s share price increased by 39%, roughly in line with the 40% premium LVMH agreed to pay.
Bernard Arnault’s continued investments in experiential luxury are part of his efforts to retain increasingly volatile customers. The global luxury hotel market is worth $83.1 billion as of 2017 and is expected to grow at a CAGR of 4.3% to reach a total size of $115.8 billion by 2025, according to consulting firm Grand View Research. Thomas Chauvet, an analyst at Citi, outlines LVMH’s expansion to high-end travel as having “limited impact on LVMH’s overall profit”, but also points out that these activities “have been among the group’s fastest growing businesses over the past few years”. Hotels accounted for close to 90% of Belmond’s $572 million in revenues during fiscal 2017. While Belmond’s revenues will contribute to LVMH’s Other Activities Group figures, even after the acquisition, the group will still remain LVMH’s smallest business division. Yet, the French conglomerate still hopes to benefit substantially from the acquisition, as LVMH’s different brands may take advantage of Belmond’s expertise in hospitality. Particularly, service-oriented houses may considerably enhance their customer experience and retail environment. Additionally, LVMH may be able to cross-sell its different brand products to its newly acquired loyal Belmond customers.
Long term upsides
The acquisition is a way for LVMH to integrate luxury goods and experiences, which is set to become the luxury industry’s new standard. The acquisition is consistent with LVMH’s long term focus of adopting pre-emptive strategies to stay ahead of competition. In wake of a potential period of uncertainty for the luxury goods industry, LVMH took the decision to venture outside of its core expertise segments, that is even before its sales stumble. However, LVMH wasn’t first to set foot in the experiential luxury business, as rival Kering purchased the albeit smaller French luxury cruise company Ponant back in 2015.
LVMH’s net debt is currently at a reasonable x0.4 EBITDA as of fiscal 2018 and is expected to increase at a x0.6 EBITDA with the acquisition, according to Citigroup analysts. Furthermore, according to Bloomberg Intelligence estimates, LVMH could spend another 20 debt-financed billion USD and still maintain net debt at a comfortable x2 EBITDA level. Hence, one may expect LVMH to further dive in the luxury hotel and experiences business in the future, be it through continued investments or acquisitions.
High-end experiences could provide LVMH with faster organic growth, as the sector grew at a fast pace globally over the past seven years, according to Bain & Company. Cruises, one of Belmond’s core activities, grew at a 7% rate on average, versus 5% for traditional luxury goods. Belmond provides LVMH with a head-start in the lodging business, as the company holds a unique, nearly impossible to replicate prime real estate portfolio. Amid slowing consumer spending in China, Belmond, with only 8% of its customers based in Asia, versus 30% for the French conglomerate, provides a way for LVMH to diversify its customer base geography. Moreover, as nearly half of Belmond’s customers come from North America, LVMH aims to strengthen its brand position and recognition across the Atlantic.
Risks and Uncertainties
In spite of LVMH’s well-established presence in the luxury industry, the success of the Belmond acquisition relies in the firm’s ability to fully adapt to the complexities of the hospitality sector, whose dynamics differ substantially from those of the traditional luxury goods segment. LVMH operates according to a house of brands model, where each one of its 70 brands is run autonomously and targets a specific customer segment. This allows the firm to be more flexible and adapt to changing customer needs more quickly. Arguably, this decentralized organizational structure ensures that the integration of Belmond will me as smooth as those of companies in the past. Yet, given how high a premium LVMH payed: 120% above Belmond’s share price prior to its announcement of a potential sale back in August of 2018, it will be hard for LVMH to capitalize on its investment. LVMH has a steady record of paying arguably too high prices. For instance, the company still hasn’t reached the break-even point for its acquisition of Bulgari back in 2011, as of fiscal year end 2018.
At the same time LVMH is expanding to experimental luxury, the world’s second and third largest luxury groups, namely Kering and Richemont, are strengthening their presence in the high-end luxury industry. Swiss luxury group Richemont, owner of upscale well-known watch and jewelry brands Cartier, Van Cleef & Arpels and Montblanc, spun-off underperforming brands such as Shanghai Tang and Lancel. Moreover, as digital luxury sales are expected to grow, reaching as much as 25% of total global luxury sales by 2025 according to Bain & Company, Richemont reinforced its presence in the online luxury space through the purchases of luxury e-commerce websites Yoox Net-a-Porter and Watchfinder.
On the other hand, French conglomerate Kering is aiming to narrow its focus on its premium houses Gucci, Saint Laurent, Balenciaga, Alexander McQueen and Bottega Veneta, which yield higher margins and sales growth than mid-tier brands. This refocus was essentially reflected in a series of managerial reorganizations and asset disposals in the last few months. In January of 2018, Kering divested its sporting goods brand Puma. Later, in March, the 17-year partnership with Stella McCartney was put to an end, as the British fashion designer bought back the 50% stake Kering owned in her namesake business. Furthermore, Kering is aiming to diversify its brand portfolio, as Gucci currently accounts for roughly 70% of the firm’s operating income. Given how reliant on Gucci Kering’s performance is, the company’s stock bears greater risk for investors, than the stock of well-diversified competitor LVMH, for instance. Hence, as per its recent numerous divestures, Kering may be preparing itself for the acquisition of larger high-end luxury assets, especially given that recent changes in the French tax code granted additional flexibility around corporate deal makings.
In a report published in March of 2018, BNP Paribas evaluated the possibility of a merger between Richemont and Kering, arguing that together, the two companies would be able to compete more effectively against giant LVMH. As Marcus Ashworth and Andrea Felsted advanced in Bloomberg Opinions: a merger “would blend the French group's strength in fashion and leather goods, with the Swiss company's prowess in watches and jewelry, and challenge the might of LVMH”. A merger, which could substantially threaten LVMH’s dominance, merely remains speculation at this stage, as both Richemont and Kering firmly rebuked the possibility of such a deal.
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