December 5, 2019 / 2:40 PM / 8 months ago

Breakingviews - Moncler offers costly fix for Kering’s Gucci habit

A Gucci sign is seen outside a shop in Paris, France, December 18, 2017.

LONDON (Reuters Breakingviews) - Moncler offers a costly cure for Kering’s Gucci addiction. The French fashion conglomerate may be considering a bid for the 11 billion euro luxury outwear company run by Remo Ruffini. That would reduce its dependence on its largest brand, but extracting value would be hard.

Coming on the heels of LVMH’s $16 billion purchase of Tiffany & Co, a marriage of 68 billion euro Kering and the maker of $1,000 or more puffer jackets would continue the wave of dealmaking gripping the bling universe. The two have held preliminary discussions about a combination, Bloomberg said on Wednesday.

For Kering, diversifying away from Gucci makes sense. The Italian brand’s boom under designer Alessandro Michele means it accounts for some three-quarters of the French group’s EBITDA. A recent cooling of Gucci’s stellar growth, however, has put pressure on Chairman and CEO Francois-Henri Pinault to expand Kering’s portfolio of brands.

A takeover would not come cheap. Under the leadership of top shareholder and CEO Ruffini, Moncler has emerged a runaway Italian fashion success story, doubling revenue since 2014. Ruffini may be reluctant to let go of his creature.

Assume Kering pays a standard 30% premium to Moncler’s undisturbed share price, and its outlay would be just above 12 billion euros, once cash of around 400 million euros is taken out. Analysts expect Moncler to make 775 million euros of operating profit in 2023. Take off tax, and the return on investment is nearly 5%, not enough to cover Moncler’s cost of capital, which Morningstar reckons is 8.9%.

To make the acquisition work, Kering would have to boost Moncler’s revenue by at least 20% a year until 2025, and raise its operating margin to 32% from around 30% currently, according to a Breakingviews calculation. That’s hard. There are probably few synergies between the two companies. And, while Moncler’s revenue rose nearly 20% last year, analysts expect growth to fall to half that level in coming years, Refinitiv data shows. The Italian sportswear maker was hit hard by the Hong Kong disruptions, and its growth may have peaked.

Kering might help. It manages several brands and has a large global presence, and so could accelerate the Italian group’s penetration in mainland China. Even then, like its jackets, Moncler would be a stylish but extravagant purchase.

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