Uncertainty often puts deal-making on pause, especially when the level of risk involved is at the scale of a pandemic. But there are always those eager to find opportunity in a crisis.
A week after LVMH knocked a modest $400 million off the original $16.2 billion price for Tiffany, Alibaba and Richemont forged a new alliance with Farfetch, investing over $1 billion in the platform while establishing a joint venture to accelerate growth in China, the world’s largest luxury market, where the pandemic has driven a boom in online sales.
This week, VF Corp also announced its acquisition of streetwear juggernaut Supreme, whose authenticity, accessible-priced product and online-heavy distribution have helped the skater label generate high single-digit growth this year as the wider apparel market has suffered steep declines. The terms of the deal valued Supreme at $2.1 billion, more than double its valuation when private equity giant Carlyle took a stake in the business three years ago.
But more common amid crises are opportunistic deals for distressed assets.
Even before Covid-19, the gap between sector leaders and the rest of the pack was widening. The virus has only accelerated this polarisation, pushing many underperforming businesses into distress and creating ripe acquisition opportunities for cash-rich frontrunners in the process.
On Monday, news that Pfizer-BioNTech’s coronavirus vaccine was more than 90 percent effective in preventing the illness in late-stage trials sent stock markets surging. Doses could be distributed to health-care workers and the elderly within weeks. But it’s improbable the drug will reach the general population until mid-2021, meaning that, for now, the world remains mid-pandemic with the fashion sector, even in a best-case scenario, unlikely to return to 2019 sales levels until late 2022, according to early data from BoF and McKinsey’s The State of Fashion 2021 report. This means more businesses are likely to fall into distress.
But don’t expect a rush of M&A right away. For sellers, who likely suffered major losses in the first half of the year, it may be advantageous to wait for better numbers before making a deal, said Erwan Rambourg, author of “Future Luxe: What’s Ahead for the Business of Luxury.” For would-be buyers, meanwhile, adding fixed cost and complexity may be unappealing as they still face challenges like renegotiating rents, repurposing staff and accelerating their digital strategies.
In 2021, however, as a vaccine becomes widely available and a rebound takes shape, we’re likely to see a significant rise in M&A activity with a focus on deals that will unlock upside in the new normal that emerges as the pandemic finally recedes.
Some acquirers will surely aim to grow their position in the fast-growing e-commerce market, much as British ultra-fast fashion e-tailer Boohoo — whose sales have soared through the pandemic despite a supply chain scandal — did when it snapped up the intellectual property and e-commerce businesses of the distressed UK Oasis and Warehouse labels in June.
Others will find opportunities for vertical integration, as when distressed French label Naf Naf sold to its Turkish supplier in July or mall giant Simon Property Group bought denim retailer Lucky Brands in August. Still, others will seek to acquire new capabilities much as French Legacy Group did in July, when it acquired shoemaker Clergerie, citing its artisans.
Larger players may focus on consolidation deals that unite complementary players to grow market share. The luxury e-commerce space, with too many players chasing too few customers despite the pandemic uptick, is certainly ripe for consolidation. Some industry analysts say 2021 could bring a merger between luxury e-commerce giants Farfetch and Yoox Net-a-Porter Group.
But the biggest deal of all, they say, would be a Richemont-Kering mega-merger, uniting each player’s strengths in hard and soft luxury respectively to mount a truly multi-brand, multi-category challenge to sector leader LVMH, whose market cap is currently three times larger than Kering’s, its closest competitor.
While Richemont chairman Johann Rupert has ruled out such a move — and a more likely transaction may be the sale of Richemont’s fashion label Chloé to Kering — some observers suggest that with LVMH’s Tiffany acquisition looking like a done deal, 2020 may yet prove a catalyst for a transformative move that could reshape the sector.