By Gustaf Baavhammar, Lukas Bruell, Christopher Leung (University of Warwick) |
Overview of the deal
Acquirer: Michael Kors. Advisors: J.P. Morgan, Barclays
Target: Versace. Advisors: Goldman Sachs, Lazard
Estimated value: $2.12bn
Announcement date: 25th September 2018
Michael Kors’ acquisition of Italian luxury fashion house Versace comes at a time of heated consolidation within the luxury domain and reflects Michael Kors’ largest effort yet to challenge Europe’s fashion conglomerates, namely LVMH and Kering S.A, by building an empire of its own. With the acquisition ending the independence of one of the last family run fashion brands, the path to building America’s first luxury conglomerate begins as Michael Kors Holdings evolves into Capri Holdings.
The American based fashion group managed to secure Versace over competitive conglomerate Tapestry Inc., who owns Coach and Kate Spade, in a deal worth $2.12 billion including debt, representing 2.5x the brand’s current revenue and 22x EBITDA. Funded by a combination of cash, debt and shares in Michael Kors Holding Ltd, the group has agreed to purchase all of Versace’s outstanding shares in a primarily cash deal which is expected to close in the fourth quarter of 2019.
The deal is a case of a horizontal merger, with Michael Kors and Versace both selling goods in the luxury fashion market, albeit in different spectra and with different target clientele and regional focus. Versace brings heritage that is unmatched by either Michael Kors or Jimmy Choo; yet Versace suffered from under-development and only managed to return to profitable ways last fiscal year. Both brands under the umbrella company Capri Holdings will continue to operate as separate entities, with Versace CEO Jonathan Akeroyd to maintain his leadership, and Versace’s creative arm still under the direction of famed Chief Designer Donatella Versace, sister of founder Gianni Versace.
“Versace is terribly under-developed. That is going to change with the resources of Capri behind them.” –John D. Idol, CEO of Michael Kors Holding Ltd
Company details (Michael Kors)
Michael Kors is an American luxury fashion house bearing a household name status ubiquitous for its affordably priced accessories, particularly handbags.
-Founded in 1981, headquartered in New York City
-President & CEO: John D. Idol
-Number of employees: 14,846 (as of 31 March 2018)
-Market Cap: $7.53bn -EV: $8.13bn
-LTM Revenue: $5.03bn -LTM EBITDA: $1.17bn
-LTM EV/Revenue: 1.60x -LTM EV/EBITDA: 6.95x
Company details (Versace)
Versace is an Italian luxury fashion company, representing the epitome of Italian glamour, producing ready-to-wear and leather accessories.
-Founded in 1978, headquartered in Milan
-President & CEO: Jonathan Akeroyd
-Number of employees: 1,500
-Market Cap: N/A* -EV: N/A
-LTM Revenue: €686m -LTM EBITDA: €15m
-LTM EV/Revenue: N/A -LTM EV/EBITDA: N/A
* Not available due to Versace’s private ownership
Projections and Assumptions
Short term consequences
Acquiring Versace would immensely boost Michael Kors’ ability to reinvigorate an otherwise stagnating luxury status, who until the recent fiscal year when the fashion house reported $4.7 billion in revenue, had been suffering from chronic decline of sales growth due to excessive brand dilution and discounting. In May 2017, Kors announced a revitalisation plan to increase brand exclusivity and scarcity, and this, coupled with its new multi-brand structure with the incorporation of Jimmy Choo, helped lift last quarterly results. Despite Versace’s couture credibility and heritage, the world famous name in pop culture struggled for the most part to grow its business for years, running extensive losses from late 1990 to 2011. A large part of such deficiencies is down to inconsistent positioning and an inability to expand leather goods, which is often synonymous with luxury. Capri’s small portfolio of business will allow Versace an unrivalled cachet that is complemented by the presence of Michael Kors and Jimmy Choo.
Synergistically, Michael Kors operates under a similar business principle as Versace, and understands the nuances of maintaining a luxury status whilst treading the tightrope of ‘diffusion lines’, which is a secondary line of merchandise created by high-end fashion house that retails at a lower price – “MICHAEL by Michael Kors” and “Versus”. More importantly, Michael Kors possesses the scale and capital resources that could help insulate Versace from “creativity-disrupting” financial nuisance in such a way that will allow the fashion house to continue focusing on cultivating artistic popularity. Moreover, the deal brings in technological synergies. Versace lacks a strong e-commerce platform, as opposed to Michael Kors, which has invested $100 million in the rapid expansion of its multi-brand e-commerce architecture, operating in US, Canada, China, Japan, South Korea and selected European countries. Through integrating Versace into its online mainframe, MK can further expand Versace’s online presence, providing it a solid footing as the volume of luxury e-commerce sales is set to triple to €70 billion by 2025.
Yet despite this, Versace’s unstable performance was not well received by the markets as it sent Michael Kors’ stock price plummeting 8.21% upon news of the potential acquisition, though Citi Managing Director Paul Lejuez described the market movement as an “overreaction”. Ultimately, there is unlikely to be significant immediate and short run effects to consumers and both firms alike, given that they continue to run under the same management. Instead, the greatest consequences are likely to lie in Michael Kors’ long-term vision for the Italian luxury brand.
Long term upsides
Michael Kors’ long term vision is evidently not only aimed at portfolio diversification but also capitalisation on the international scene whilst countering fierce competition in the e-commerce platform, discount outlets and fast-fashion brands. Versace seems to be able to benefit from the strong capital foundation of MK, which announced plans to invest in a rapid expansion of Versace’s global retail footprint by increasing store count from 200 to 300 and expanding presence in areas where the Italian has ‘insignificant’ business – Europe, Japan and South Korea. Alongside this, MK’s plans to expand Versace’s accessories and footwear from 35% to 60% of the brand’s revenue is a seemingly calculated maneuverer considering its recent acquisition of Jimmy Choo which specialises in exactly this field. Such tactic would help reposition the luxury juggernaut to dominate a greater slice of the high-end market, allowing Versace to better compete against market rivals such as Gucci and Louis Vuitton.
However, the promise of opening 100 new stores across the US, Europe and Asia has raised questions whether MK is falling into the same trap that led to its descent – dilution. Brand stores in every major airport contradicts the core element associated with luxury – exclusivity and scarcity. This could send mixed signals to investors who recently saw 42 Versace stores close in 2017. Despite this, Capri Holdings still holds high expectations to increase revenues to $8 billion in the long term with $2 billion to be generated by Versace alone – a substantial jump in projections of Akeroyd who expected sales of roughly €1 billion in 2018.
With the global luxury market estimated to be worth $307 billion in 2017 and expected to reach $446 billion by 2025, Michael Kors’ plans for Versace is most certainly one for the long run and now seems a good time to begin. Even with the cost synergies unlocked when getting better deals on real estate and media, there is still a long way to go before approaching the scale of European counterparts, especially when Michael Kors, Jimmy Choo and Versace combined brought in less revenue last year than Gucci alone did for Kering S.A.
Risks and Uncertainties
Michael Kors’ entering the luxury world with a lack of experience in the sector comes as a risky move, especially when some have questioned the $2.12 billion valuation far too high for a company that consistently struggled to grow sales and frequently run losses. Generating less than $1 billion revenue per year, Versace is far below conglomerate owned rivals such as Louis Vuitton, Gucci and Saint Laurent.
Additionally, the primary concern surrounds Kors’ underlying vision for Versace, and investors fear a recurrence in the American conglomerate resorting to heavy discounting as means of selling its products. Furthermore, the manner in which the iconic brand built its name through extravagance, vibrant colours, and boldness conflicts with the predictability of Michael Kors’ basic merchandise and this has raised doubts whether family-run brands which focus on a particular artistic dream can maintain their core value when managed by conglomerates hungry for profit and recognition. The contrast between Italian heritage, culture and craftsmanship against a brand that has traditionally made money in malls is blaring, but despite the two brands operating at opposite ends of the luxury spectrum, they complement each other in terms of strengths and weaknesses.
With fashion writers dubbing 2017 as “the year of Versace”, it remains to be seen whether Capri can maintain this momentum given the rapid transition in fashion trends. Historically, Versace falters in comparison to peers when it comes to adapting to fashion trends with 2017 being the only profitable year after 3 consecutive years of losses. While it is probable that Versace’s refusal to being sold to the French group LVMH, due to their political tensions, the acquisition on Michael Kors’ part should exclusively be one in pursuit of diversification towards luxury rather than moulding Versace into its own aesthetic.
“At the end of the day, because Versace is well known everywhere, it is a sleeping giant… If in some way [we could] awaken this giant – my God, you have a power.” –Versace's former CEO, Giacomo Ferraris (2015)
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