Burberry warning could delay luxury M&A

PARIS Fri Sep 14, 2012 12:21am IST

Saleswomen wait for customers in a Burberry shop in Beijing, July 11, 2012. REUTERS/Jason Lee

Saleswomen wait for customers in a Burberry shop in Beijing, July 11, 2012.

Credit: Reuters/Jason Lee

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PARIS (Reuters) - British fashion house Burberry's profit warning this week could put on ice potential acquisitions in the luxury sector as fears are growing that the industry's growth forecasts could be cut further, a top corporate finance executive told Reuters.

Potential buyers gauging the value of luxury assets by their growth potential will want to wait to hear what rivals of the British brand have to say about the sector outlook before sealing any transaction, predicted Marco Belletti, global head of consumer retail and luxury at the corporate finance division of Societe Generale.

"In the short-term, valuations (of luxury assets) will be affected," Belletti told the Reuters Retail and Consumer Summit on Thursday.

"We are just seeing the first signs of this correction ... The next month will be critical to understand what is happening in the (luxury) sector. We will see what other luxury brands have to say," he told the summit, held at the Reuters office in Paris.

The luxury goods sector rebounded strongly after the 2008/2009 financial crisis but analysts say the boom days now seem to be over as trading conditions have worsened since the beginning of the year, and more severely since the summer.

Burberry (BRBY.L) on Tuesday warned sales growth had slowed down much more than expected, especially in recent weeks and added it was not alone, suggesting other big luxury brands were feeling the pinch.

It admitted that part of the problem came from weaker demand in China.

Mark Belford, co-head consumer and retail at the investment bank arm of Janney Montgomery Scott believes the first red flag for the luxury industry was waved a few weeks earlier, by Tiffany & Co (TIF.N).

The U.S. jeweler late last month cut its sales and earnings forecasts for the second quarter straight, citing a tough global economic climate.

"A lot of distress is coming out of the Asian markets, China in particular ... and that reverberates into this country (USA) as well," he told the summit in New York.

Belletti said the slowdown in luxury sales growth was due to several factors including the debt crisis in Europe, weaker consumption in China and a drop in global travel as tourists made up the bulk of luxury goods buyers.

If luxury demands softens, sellers might want to hold out for the industry to recover before they put their assets on sale, Belletti suggested.

Names often cited by investors that could change hands include Hugo Boss (BOSSn.DE), which is controlled by private equity firm Permira. Elsewhere, Italian family-owned fashion brand Versace has said it may seek outside investors.

PRICES TO FALL

As the environment worsens, analysts predict the price of luxury assets could go down and high-priced deals such as the July sale of Permira's Valentino to the Qatari royal family are unlikely to be repeated.

The deal valued the Italian fashion brand at around 700 million euros ($903.49 million), or 31 times its 2011 EBITDA, more than twice the luxury sector's average.

Shareholders in luxury companies that want to sell their stakes on the open market via an initial public offering or a placing might also want to wait and see, Belletti said.

Investors will likely demand more information about the current slowdown before a company can pencil in a market valuation, he said.

Italian notebook maker Moleskine has said it planned to list in Milan this year in a deal that would allow its private equity shareholders to sell their stake.

Some analysts expect luxury sportswear maker Moncler, which pulled its plans for a flotation at the last minute last year, could come back to the IPO market.

If in the short term, times look challenging, Belletti said that the luxury goods sector's growth prospects remained attractive in the medium to longer term, driven by penetration of new markets such as Indonesia.

He said China's growth prospects also were still strong - relative to other countries - and luxury brands would continue to benefit from building up their presence inland, in second and third tier cities.

(For other news from Reuters Retail and Consumer Summit, click here)

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(Additional reporting by Pascale Denis in Paris, Antonella Ciancio in Milan and Phil Wahba in New York; Editing by Hans-Juergen Peters)

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