Opinion: Luxury M&A Opportunities Will Heat Up Post-COVID. Here’s Why.


Mario Ortelli | March 23, 2021

Moncler's MONDOGENIUS concept.Credit: Courtesy of Moncler.

As the effects of the global COVID-19 pandemic continue to reshape the luxury industry, we can expect to see increased appetite for M&A deals, says Mario Ortelli, managing partner at consultancy Ortelli&Co.

In the past few months alone, the luxury sector has been awash with the news of completed deals and billion dollar acquisitions – indeed, three deals worth nearly $20 billion have either completed or been announced since October, starting with LVMH’s $15.8 billion acquisition of Tiffany. This was quickly followed by VF Corporation’s announcement in November that it had acquired Supreme for $2.1 billion, and Moncler’s news in December that it has purchased Stone Island for $1.4 billion.

And the deals keep coming. Earlier this month, Onward Holdings announced it is selling its Jil Sander brand to Italian luxury conglomerate OTB, which also owns the Maison Margiela and Marni. And Exor, the Italian holding company for Italy’s Agnelli family, invested €541 million in French shoemaker Christian Louboutin.

The announcements are an indication of what is yet to come in the luxury market - thanks to three factors that are driving the appetite for deals. As the effects of the global COVID-19 pandemic continue to reshape the industry, we can expect to see more luxury players looking for opportunities to help strengthen their portfolios or venturing into new directions they might not have considered before.

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The first thing to consider about mergers and acquisitions is that luxury is a business in which scale greatly matters. In fact, in order to build up and manage global brands, maintain consistent product innovation, leverage marketing spend to remain relevant with your consumer and keep pace with the digital evolution, you need to be of a certain size. The bigger the company, the more synergies and competencies there are to boost the creative and business sides of a brand in a balanced way.

The ongoing global COVID-19 pandemic is another factor. The personal luxury goods market contracted for the first time since 2009, with a drop of of 20-30 percent according to the estimates of McKinsey, BCG and Bain, heavily impacted by the changes that COVID-19 has had on consumers’ spending and shopping habits. With pretty much every luxury company out there reporting significant falls in their earnings over the past year, the disruption has revealed to some business owners that no business in world is fully bulletproof, resulting in a search for partners to minimise the exposure to risk to their businesses. And those that were in a more fragile financial state, or relied too heavily on physical retail, at a time when online shopping for luxury goods has soared -doubling its share of the market from 12 percent in 2019, to 23 percent in 2020 – are now scrambling to find other resources to bolster their businesses or to keep them alive.

Lastly, interest rates are at a historical low. Those who are cash-rich find themselves at a moment in time when the market is ripe for investment, and sellers in the market appear to be more open to advances, resulting in the perfect moment for luxury companies to sell or make acquisitions.

While highly unlikely, the chance to acquire French fashion house Chanel would mean an "opportunity of a lifetime" in the luxury market.Credit: Photo: Courtesy.

Who Are The Buyers?

In such a market, it’s important to know who the buyers and sellers are. From the buy side, there are three categories. Firstly, there are the luxury conglomerates -LVMH, Kering and Richemont. Secondly, there are the smaller but significant players like Moncler, and last but not least, there are financial investors like private equity firms.

The motivation and strategies of these three players are all different. For big groups like LVMH and Kering, acquisitions in their core business of personal luxury goods should be of a material size that can move the needle at group level.

It is fair to assume that a soft luxury brand should have at least $1 billion in revenues to enter into the radar of LVMH, and for Kering, at least $500 million. Brands that these groups seek to acquire are those with a strong positioning like Tiffany and Loro Piana, rather than those in need of a major turnaround. The opportunity for these groups here is to help sharpen and enhance the image of these brands, and exploit their potential synergies to create further growth for them.

The second kind of buyers are companies that are in a good financial position and willing to pursue additional growth without overstretching their brands or want to add complimentary brands to their portfolio. This can be seen with Moncler and Stone Island, Zegna and Thom Browne, OTB and Jil Sander.

And last but not least, there are private equity firms, which have a shorter investment horizon and tend to offer lower prices than industry investors because they have less synergies. These buyers can dare to be a bit braver, investing in companies which need a big turnaround. Or they can help accelerate in a smaller company or brand to help them reach a point where these brands become a more interesting target for larger players.

Who Are The Targets?

From the sell side, there are firstly: business owners who want to sell and secondly: companies that need a buyer to survive. While the chances remain highly unlikely, should a brand like Chanel, Patek Philippe or Audemars Piguet ever want to sell, these types of companies represent an opportunity of a lifetime for buyers like LVMH, Kering or Richemont. Likewise, if Mayhoola decided to sell Valentino, this represents a one-of-a-kind opportunity in which the seller can decide the rules.

Then there are smaller companies that are in good shape, but see the opportunity to be part of a bigger organisation, or are exposed to generational changes. For example, Stone Island is a highly profitable company and could well have grown alone, but the opportunity to integrate into Moncler proved irresistible and the potential for brand synergies and growth made for a compelling union.

Companies that seek a buyer are those in a need for a financial injection, or those looking for specific competences from an industrial partner. This is more or less the moving part of the sector, as big deals do not happen every year due to a lack of targets in the market. Whereas smaller deals for companies with financial distress will happen a lot because there are sellers that are somehow forced to make a deal.

Lastly, if we expand or view to the broader luxury sector and not only at personal luxury brands, there are many other M&A opportunities. In particular, there will be many deals that provide luxury companies with upward and downward vertical integration (eg. manufacturing companies, franchisees, etc).

Another hot sector will be the one of digital luxury with the ongoing consolidation in the industry (e.g. Farfetch – Stadium Goods) and the renewed interest of financial investors in this space with a boost of valuations (e.g. MyTheresa IPO). Finally, many luxury buyers are looking at acquisitions of experiential luxury brands and business in homeware, design, wellness, etc. For example LVMH can invest more and more in hospitality, after its Belmond purchase, not just in hotels, but for instance, travelling services or fine dining - there are many adjacencies in which they can go.

To sum up, appetite for M&A activity remains high and when opportunities in the luxury sector come to market, there are many potential interested buyers.

Luxury | M&A | Opinion