Mergers and Acquisitions: Investing in Luxury

High fashion is flying high with the latest mega-deal: a whopping $2.12-billion price tag (all figures in U.S. dollars) for Italian luxury brand Versace. American conglomerate Michael Kors, having already bought London-based shoe brand Jimmy Choo in 2017 for $1.2 billion, has added another label known for its jet-set sizzle and red-carpet appeal. The acquisition is the latest in an industry where smaller, well-known — but underperforming — fashion brands with global potential are being snapped up.

Versace was founded in 1978 by Gianni Versace, and his high-octane, brightly coloured, slinky dresses defined the over-the-top style of the '80s and early '90s. After his assassination in 1997, his sister Donatella became artistic director, but the brand struggled to regain its mojo and financial momentum, running losses until 2011. In 2014, private equity firm Blackstone invested $280 million for a 20-per-cent stake in order to help Versace fund overseas expansion.

Many smaller companies have already been sold off to larger firms, so it will be interesting to see if the merger-and-acquisition trend in the luxury fashion sector still has legs. For investors, here are some interesting details about the industry to keep in mind:

Size Matters

Versace's shimmery cocktail dresses may work best in smaller sizes, but when it comes to the business of fashion, bigger is always better. Last year Versace posted a paltry profit of $18 million; the previous year it lost $8.7 million. In the high-stakes gamble of fashion retailing, conglomerates have many advantages. The nature of fashion is fickle — the popularity of different brands can fluctuate wildly from year to year depending on style trends and tourist traffic flows. Large conglomerates such as France's LVMH, which has 70 luxury brands on its roster including Louis Vuitton, always have a few strong performers to offset weaker brands. Large firms are also in a stronger position to negotiate with suppliers, landlords and advertising sales reps. Acquiring Versace gives Michael Kors the opportunity to better compete with its European rivals.

American Know-How vs. Euro Chic

European brands rule luxury. According to the most recent report of The Lyst Index, a quarterly ranking of fashion's hottest brands, most of the top 10 were based in Europe. (Versace was number seven thanks to the buzz around its sponsorship of the Heavenly Bodies exhibition at The Costume Institute at The Metropolitan Museum of Art in New York, as well as the TV mini-series based on Gianni Versace's murder in Miami.) While European brands have a long history of producing luxurious goods, American companies may have the business edge when it comes to extracting monetary value.

Demand for Luxury is Growing

According to Bain, a global management consultancy, the personal luxury goods market is expected to grow six to eight per cent in 2018 and reach over $400 billion in annual sales by 2025, largely driven by growing demand from China. Who knows what this could mean for those remaining independent luxury brands.

Fun Fact: It's fitting that Michael Kors will be renamed Capri Holdings after the deal is complete. It's a glamorous, jet-set destination with steep cliffs that offer a breathtaking view of the sea — plus, one of the company's current perfumes is called Island Capri.