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Kering's reported interest in Moncler signals more M&A in luxury sector

Kering SA's reported interest in fast-growing Italian fashion brand Moncler SpA is the latest sign that big European luxury houses continue to view the acquisition of smaller high-end brands as a way to diversify exposure across different segments and better compete against each others' growing bulk.

Shares in Moncler, maker of $1,500 puffer jackets and sportswear, initially jumped 11% on Dec. 5 following a report by Bloomberg News that the company held exploratory talks with Kering, owner of Gucci, about a possible merger or deal.

The news also pushed up shares of other potential M&A targets in the luxury and apparel industry, including Italy's Salvatore Ferragamo SpA, whose stock rose nearly 6% on the Milan Stock Exchange, and Prada SpA, which edged up 1% on the Hong Kong exchange. Shares of the U.K.'s Burberry Group PLC rose 4% in late-morning trading on the London Stock Exchange.

Kering did not immediately respond to a request for comment. In an emailed statement, Remo Ruffini, chairman and CEO of Moncler, said that from time to time he "maintains contacts and interacts with investors and other sector participants, including the Kering group, in order to explore strategic potential opportunities. ... At the moment, however, there is not any concrete hypothesis under consideration."

Based on Moncler's market value, a transaction could be valued at roughly 10 billion.

On Dec. 5, after Ruffini in his statement played down the prospect of an imminent deal, Moncler shares fell back after an initial surge to close at €41.52, a 6.9% increase for the day. Kering's shares closed up 0.4% at €540.30.

The luxury sector has seen a spate of M&A transactions in recent years as big players try to tap into growing demand from well-heeled, younger consumers in China, India and the Middle East, as well as the steady rise of affluent buyers in the more traditional markets of the U.S., Europe and Japan. According to a July 2019 report by Deloitte, M&A transactions in the luxury industry jumped 22% in 2018 compared with 2017, led by the hotel sector and the cosmetics and fragrances sector.

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In May 2018, Cartier owner Compagnie Financière Richemont SA bought the rest of online luxury retailer Yoox Net-a-Porter for $3.3 billion and then acquired Italian jeweler Buccellati Holding Italia SpA for $252 million in September 2018. That same year, French lens-maker Essilor and Italian eyewear company Luxottica Group SpA sealed a 46 billion merger to create EssilorLuxottica Société anonyme, while Michael Kors (USA) Holdings, Inc. bought Italy's Gianni Versace SpA to create Capri Holdings Ltd.

In December 2018, the world's biggest luxury company, LVMH Moët Hennessy - Louis Vuitton Société Européenne of France, snapped up hotel operator Belmond Ltd. for $3.2 billion and followed it up with the recent agreement to swallow the far larger Tiffany & Co. for about $16 billion.

The Tiffany deal, in particular, was partly driven by LVMH's desire to become less dependent on its fashion and leather goods business, which includes Louis Vuitton. The deal "is an important milestone for our group as it helps further balance our revenue by segment," said CFO Jean-Jacques Guiony on a call with analysts after the deal was announced. "When we look at the transaction in terms of operating profit, the re-balancing is even clearer as watches and jewelry, which represented 7% of our earnings before interest and taxes in full year 2018, becomes our third-largest contributor with 13%."

Kering is even more dependent on its clothing and leather business and on a single brand — Gucci — which contributed 8.29 billion, or 63%, of the company's overall 13.25 billion revenue in 2018. But unlike its peers, the French company, run by billionaire Francois-Henri Pinault, has been a wallflower at the M&A ball: its last significant acquisition was in 2013, when it bought Italian jeweler Pomellato S.p.A. for $390 million.

The acquisition of Moncler, should it happen, would reduce Kering's exposure to Gucci's fortunes considerably. However, because core outerwear accounts for most of Moncler's revenues, the company faces the risks of seasonality and cyclicity. And for Kering, no transaction will come cheap.

At the close of Dec. 4, Moncler was trading at 5.8x revenue, 15.7x EBITDA and 26x its price-to-earnings ratio. By comparison, the price LVMH agreed to pay for Tiffany works out to 3.7x sales and 16x EBITDA.

"Given that a premium would be needed to finalize the deal, we believe it is likely that an acquisition, if it materializes, will come at a very hefty price and value generation would be problematic," said Jelena Sokolova, analyst at Morningstar. Sokolova estimates that Kering has about 17 billion to 18 billion in acquisition firepower, while Moncler's current enterprise value is about 9.6 billion.

"The industry has a lot of cash in the pockets and valuations are high enough for sellers to induce selling," said Sokolova, in an emailed comment to S&P Global Market Intelligence. "Big groups such as LVMH and Kering have been recently performing stronger on average than single-brand companies, which may make being part of these groups seem more attractive for standalone brands. Since Kering has recently been very strong in turning around its own brands with new creative leadership I am a bit surprised they decided to go after Moncler, with its already very strong execution and margins, rather than for something that requires a turnaround but may be cheaper."

Sokolova estimates that after the Tiffany deal closes, LVMH will still possess about €30 billion in acquisition firepower, while Richemont would have the capacity to spend about €10 billion or more on future acquisitions. The most likely targets are the few remaining independent luxury fashion brands, including Burberry, Ferragamo and Prada, Sokolova added.