Moncler mulls bid for Burberry
There is growing industry chatter that high-end puffer jacket maker Moncler could be considering making a bid for London-listed Burberry to create an outdoor specialist giant. Several industry sources say Bernard Arnault, CEO and controlling shareholder of industry leader LVMH which recently invested in Moncler, is keen to see such a deal happen.
Moncler and Arnault believe Burberry can be turned around and more value extracted from the brand with the right strategy and management and away from the market’s scrutiny.
The potential deal has emerged as demand for Moncler’s shiny puffer jackets is cooling. The brand appears to have hit a peak in sales growth, industry analysts say. Last week, Moncler reported a 3 percent drop in like-for-like revenue in the third quarter, slightly worse than analysts expected.
If Burberry’s turnaround were successful, it would give Moncler a significant boost. Also there would be great synergies between the two companies. One obvious one is in the supply chain. Moncler is the best-in-class manufacturer of puffer jackets and Stone Island, which belongs to Moncler, also makes high-quality outdoor jackets. It would be “plug and play” for Burberry as the two outerwear specialists could make the British brand benefit from their supply chains and improve its own range of high-quality jackets of all kinds.
Burberry declined to comment. Moncler did not reply to requests for comment.
There could also be synergies in terms of boutiques. Burberry needs to downsize its portfolio, analysts believe, particularly if it is going to focus on outerwear and reduce its fashion offering. Many of its stores are too big. Hence, it could potentially hand over some locations to Moncler. Pruning Burberry’s portfolio would also lower costs and improve the company’s profitability.
In September, LVMH took a 10-percent stake in the investment company Ruffini Partecipazioni Holding, controlled by CEO Remo Ruffini which has a 15.8 percent stake in Moncler. Last month, the two companies said they had agreed not to increase their stake in Moncler to more than 20 percent in the next three years.
“I have been told by bankers close to Burberry that the company was feeling vulnerable, which means that a bid could be in the works,” one industry source told Miss Tweed on condition of anonymity. Another industry source said he had dinner with Remo Ruffini’s two sons Pietro and Romeo last summer and “they were discussing Burberry at length and what needed to be done to turn around the company.”
Moncler has been looking at Burberry for many years, financial sources say. But the company’s market valuation was too high to consider making a bid. Now that its market capitalisation is £2.9 billion, down from close to £7 billion in 2023, its pricetag looks much more attractive.
Burberry’s share price has been going up steadily in recent weeks on speculation that a bid could be afoot. On Friday, Burberry shares closed at 818 pence, or 43-percent higher than its September low point of 517 pence reached on Sept. 10.
MASTER OF THE TAKEOVER
If Moncler was to make an offer for Burberry, it would probably be either in shares or a mix of cash and shares, bankers believe. At the end of 2023, Moncler had net cash of €1.033 billion, excluding liabilities for store leases. Hence, the company does not have enough cash on its own to make a full-cash takeover bid. However, LVMH could provide financing if needed, bankers say.
Arnault is a master of the takeover. The luxury tycoon created the world’s biggest luxury goods group, thanks to an aggressive acquisition strategy that earned him the moniker “the wolf in cashmere.” Burberry has long been seen as a takeover target from bigger groups, including Arnault’s arch rival Francois-Henri Pinault, who controls Gucci parent Kering.
Kering is weak at present because Gucci is struggling to turn itself around. So, it looks unlikely that Kering would be in a position to mount a rival bid, particularly since it may have debt issues of its own if its cash flow does not markedly improve in the near future.
Arnault has already snapped up a stake in Moncler from under Pinault’s nose. Ruffini spoke as recently as last spring about his ongoing talks with Pinault about the Frenchman taking a stake.
That said, Arnault may have bid competition from across the pond. Some investors have been saying that Tapestry could make an offer for Burberry after the U.S. group’s deal to acquire its close rival Capri was blocked by the U.S. Federal Trade Commission on Oct. 25.
“We calculate that buying Burberry at a 30% premium to the current share price (748p) would cost around €4 billion and could generate a 10% pretax return on investment, assuming that the EBIT margin can return to the 11.0% level,” Bernstein wrote last month about the potential tie-up between the two companies.
Tapestry owns accessible luxury brands Coach, Kate Spade and Stuart Weitzman which trade in a much lower price category than Moncler and Burberry. Therefore, from a strategic point of view and market positioning, Burberry and Moncler have more in common.
Also, synergies between Tapestry and Burberry would not be as attractive as they would be between Moncler and Burberry, industry analysts say. Thus, a Burberry-Moncler tie-up would make more sense than with Tapestry, investors say. Moncler has established itself as a market leader in outdoor clothing, a category which has grown strongly in the past 15 years, “eating Burberry’s lunch in the process.” Focusing on that segment is one of Burberry’s many missed opportunities, some industry analysts say.
If Moncler is serious about making a bid for Burberry, it may want to hurry up. Legally, Tapestry cannot get out of its deal to acquire Capri before February 2025, also called the “stop date.” Therefore, Moncler’s approach could not be challenged by Tapestry before that time.
SHARE PRICE RISE
The brand’s new ad campaigns released last month have been welcomed by investors and contributed to the rise in the company’s share price. They signal a change in focus from fashion to outerwear, a field in which Burberry has much more legitimacy than in fashion and something investors have been asking for many years, as Miss Tweed wrote on Friday. Burberry is finally doing what it should have been doing for years: focusing on its heritage as a British outerwear company. Initiated by the previous CEO Jonathan Akeroyd, the company’s new CEO Joshua Schulman, in place since July, is getting the credit. It is unfair but little can be done about that.
On the back of the new ad campaigns, many investors, analysts and journalists said they felt that for the first time in years, the brand felt relevant again.
“It is refreshing to see Burberry go back to its core DNA,” Luca Solca, luxury goods analyst at Bernstein, told Miss Tweed. “The new campaign goes back to basics: it is quintessentially British and showcases the most iconic Burberry products.”
Bernstein was the first broker this week to upgrade Burberry’s rating to “outperform.” It called the company “our preferred self-help story.” Bernstein said it was encouraged not only by the new campaign but also by the company’s new strategy with regard to pricing.
“Burberry's plans on pricing are starting to make sense,” Bernstein wrote in a note published on Oct. 30. “Department stores are reporting a pragmatic view on what the brand can do, with a focus on opening price points at a more realistic level, especially in product categories like leather in which the brand’s credibility is low.”
Shortly after Bernstein, HSBC upgraded Burberry to a “buy” rating. “We think management's priority will be rebuilding brand equity and regaining share, with margin expansion coming as a consequence,” the broker said in a note published on Oct. 31.
“Burberry’s heritage is outerwear: the brand was founded in 1856 when Thomas Burberry, a former draper’s apprentice, opened a store in Basingstoke, England, focused on outdoor attire. In 1879, Burberry invented gabardine, a lightweight, breathable, weatherproof and tearproof cloth. We would view it positively if Burberry were to build up its brand equity on its DNA – outdoor and gabardine – as it would make sense for customers to rely on the brand for what it is best known for. Once the Burberry outerwear category becomes an unavoidable purchase destination, then stretching the brand towards other businesses more meaningfully could be successful. Today, the €2,000 handbag category is very crowded and it seems that consumers are not willing to give Burberry credit in a leather category where it has traditionally been a follower.”