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LVMH's purchase of Belmond buoys momentum of M&A in luxury sector

LVMH Moët Hennessy Louis Vuitton SE's purchase of hotel operator Belmond Ltd. for $3.2 billion represents a big push into the luxury hospitality business and, more broadly, suggests continued momentum in M&A activity in luxury goods sector as more and more high-end brands get snapped up by the largest houses.

Even without including the latest transaction or Michael Kors Holdings Ltd.'s planned 1.83 billion acquisition of Gianni Versace SpA, which has yet to close, about $5 billion has been spent acquiring European luxury fashion companies in 2018, more than was spent for the last four years combined, according to an analysis by PitchBook, which compiles financial data. On a global scale, acquirers have spent $7.5 billion in 2018, compared with about $5.1 billion in 2017, the Pitchbook data shows.

"Luxury companies still have lots of firepower for deals," said Jelena Sokolova, analyst at Morningstar Inc., in an emailed response to questions from S&P Global Market Intelligence. "Most of the big European groups such as LVMH, Kering SA, Compagnie Financière Richemont SA and Swatch AG, have net cash or minimal net debt positions and could raise financing for bigger deals." According to Sokolova, LVMH has about 25 billion available on its balance sheet that could be deployed "in the next 12 to 18 months, as we foresee an uptick in M&A activity in the sector."

A great deal of the recent M&A activity is driven by luxury houses' attempt to seek out new areas of growth and demand from the increasingly affluent middle and upper classes of China, India and the Middle East, but there are other factors at play too. Richemont's acquisition of YOOX Net-A-Porter Group SpA was driven by the Swiss company's desire to boost its e-commerce presence. Michael Kors acquired Versace to help diversify its product range and offset challenging times at its core brands. In pursuit of economies that come with scale, French lens maker Essilor and Italian eyewear company Luxottica Group SpA recently completed their €48 billion merger to create EssilorLuxottica Société anonyme, one of the largest players in the eyewear industry.

As for LVMH, the company "is opportunistic, acquiring business across verticals, such as Rimowa in luggage, Christian Dior in fashion, Belmond in travel," said Sokolova. The French luxury conglomerate, with annual revenue of about 42.6 billion in 2017 and a stable of 70 prestigious brands, already runs a collection of luxury properties, including Bvlgari hotels and the Cheval Blanc properties. The latest transaction will significantly boost its presence in the hospitality industry and potentially enable it to benefit from a rosier outlook for luxury travel, which was in the doldrums for several years.

"The future of luxury will not be only in luxury goods, as it has been for many years, but also in luxury experiences. It's as simple as that," said Jean-Jacques Guiony, CFO of LVMH, in a conference call with analysts Dec. 14 after the Belmond deal was announced.

Founded in 1976, British high-end hotel operator Belmond runs 33 hotels across the globe, including the Copacabana Place in Rio de Janeiro and Hotel Cipriani in Venice; three luxury safari lodges in Botswana; New York City's famous 21 Club restaurant; river cruises; and seven luxury trains, including the Venice-Simplon-Orient Express. The company reported revenue of $572 million for the 12 months ended September.

The transaction requires regulatory approval and is expected to close in mid-2019, LVMH said. The impact on earnings is anticipated to be minimal — "broadly neutral," according to the company. The price tag for Belmond, at over 5x revenue and 23x EBITDA, "is quite hefty though," said Sokolova of Morningstar.

Rather than immediately acquiring additional properties, "the priority is to develop the Belmond brand, improve the profitability of the [existing] properties and to nurture a collaboration with LVMH's other brands," Guiony said. For example, the French company's wines and spirits could be served at Belmond locales and client events could be held at each other's properties.

It is unclear whether the pace of M&A activity in the luxury goods sector will be sustained. Most iconic brands are already owned by the big luxury houses, and of the remaining ones, such as Burberry Group PLC, Chanel SA, Prada SpA and Giorgio Armani SpA, most have extremely high valuations or are privately held with owners who seem reluctant to sell.

But that could change. "Should the weakness in the sector prices seen over a couple of months persist or the near-term demand situation weaken, valuations could get more attractive, prompting more M&A activity," said Sokolova. "Generational changes and difficulties operating in an increasingly difficult environment for some privately and family-owned companies could make sellers more willing to sell."