According to the announcement recently made by the Bloomberg agency, giant Kering have its eyes on Moncler, especially known for its down jackets upscale. Swetha Ramachandran, manager of the GAM Global Luxury Brands fund, decrypts for Luxus Plus this merger project, which comes shortly after the announcement of the acquisition of Tiffany by LVMH.
By Swetha Ramachandran, GAM Global Luxury Brands Fund Manager
The luxury sector is considering the next consolidation operation
We expected the acquisition of Tiffany by LVMH to be the catalyst for a consolidation cycle in the sector, including Kering-Moncler.
But the race seems to have started faster than expected as information circulates about “exploratory” discussions about a possible rapprochement between the two companies.
Kering’s ability to be flexible with respect to the firepower of its balance sheet, and its efforts to reduce its dependence on Gucci should be welcomed by the market.
But now that Moncler, this coveted and high-quality growth asset, is more or less officially in the game, we can expect it to be the one that gets the most benefit in terms of impact on the market, share price, disproportionately.
Operation Kering-Moncler would be based on a logic substantially different from that of LVMH-Tiffany
The latter is based on the proven ability of the LVMH group to recover high-end luxury assets in difficulty (like Bvlgari in 2011, whose margins have doubled since its acquisition) and on its understanding that a turnaround in the high-end luxury sector is a long-term business, which is best conducted on a quarterly basis and away from market surveillance.
Moncler is already a superbly managed company, the industry leader in terms of profitability and sales productivity. It’s hard to see how Kering could do better.
At the very least, Moncler management could probably put its best practices in Kering’s accessible luxury brands to good use.
For Kering, the logic is very likely to diversify away from Gucci, which currently accounts for 80% of the Group’s profits and is entering a normalization phase after several years of unbridled growth, under the direction of creator Alessandro Michele.
With Moncler, whose organic growth strategy is running at full capacity, Kering will have a rising asset, as opposed to an asset like Tiffany that requires significant investment.
Moncler should benefit from a nice premium over its current valuation of 10 billion euros, and this for several reasons.
It enjoys a unique position in the accessible luxury sector and more particularly in the underutilized category of luxury outerwear; the growth potential of its turnover is very noticeable due to the launches of products that follow one another; its sales density and therefore its margins are among the highest in the sector thanks to rigorous price discipline; lastly, and above all, it generates a lot of cash.
Kering’s proven interest in a company that is already superbly well managed and has excellent momentum, and that of LVMH for high-end luxury rather than affordable luxury (although with Tiffany, the group has bought a company the fundamentals are quite weak, with significant restructuring potential) are ominous for Tod’s, Ferragamo, Hugo Boss or to a lesser extent, Burberry (given the presence of some signs of recovery, as distant as they are), which are delivered to themselves.
In the mergers and acquisitions cycle that currently occupies the sector, the power of the brand as well as the operational dynamics are at the center of the buyers’ concerns.
The future of underperforming brands is therefore all the more uncertain.
What is the next target? All eyes are on Hermès and Richemont
The natural purchaser of Hermès could be Chanel, a private company, given the similarity of their supply-based sales strategies.
It remains to be seen if the current owners of Chanel are sellers, and on what horizon.
Richemont seems caught between the hammer and the anvil; Kering’s interest in Moncler keeps him away from Richemont. In our opinion, Richemont’s fundamentals should be much more uncertain than at present for the company to consider a merger or sale.
