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The Qatari investment company Mayhoola, owner of the fashion brands Valentino and Balmain, no longer aims to build a luxury group on its own but sees itself as an influential minority shareholder in Kering in the medium term, its CEO told Miss Tweed in an interview.

In July, Mayhoola agreed to sell 30 percent of Valentino to the French-based group for €1.7 billion in cash. The deal is expected to close at the end of November. However, what will happen to Balmain? Will the Qatari company sell it, together with Valentino, in exchange for a bigger stake in Kering? And how influential does Mayhoola plan to be?

It may not be a bad idea for Kering to have a weighty shareholder holding its managers and executives to account, including CEO François-Henri Pinault. It is always healthy to have people around you asking difficult questions. Mayhoola is based in Doha and invests money on behalf of the emir, Sheikh Tamim bin Hamad Al Thani who owns the Paris Saint-Germain football team among many other assets in areas such as real estate, luxury and banking.

Rachid Mohamed Rachid is the CEO of Mayhoola and chairman of Balmain and Valentino. An Egyptian national, he was previously Egypt’s minister of trade, industry, and investment and president of Unilever North Africa. He also runs a family fund called Alsara Investment Group which has more than $2 billion in assets under management. It is behind the planned revival of the Italian brand Walter Albini, for which Alessandro Michele could be hired if he does not go to Fendi. Alsara also owns the Japanese eyewear maker Akoni, which supplies Valentino and Balmain.

Mayhoola may decide to use some of the cash it will receive for the Valentino minority stake to buy Kering shares in the market while the price is depressed, like that of many other luxury stocks. Investors are concerned about a normalization of sales growth after the post-pandemic boom and demand from Chinese consumers not growing as strongly as expected. There is also enduring weakness in the U.S. “While we hope for a rebound in Q4, mostly for technical reasons (easier basis of comparison in China and in the U.S.), we believe we are unlikely to get such comfort about any rebound in momentum before very late in the year,” HSBC wrote in a note published this week.

Rachid told Bloomberg in an interview last month that he expected sales growth in 2023 to be below 10 percent as consumers spend more money on travel and experiences than on luxury goods. He also said that there was an agreement with Kering that Mayhoola should become a shareholder in the French group.

Kering’s stock is already down 30 percent since its peak of around €600 a share at the end of March. It has underperformed sector peers such as Richemont and LVMH, and its shares have nearly halved since an all-time high of more than €800 in the summer of 2021. On Friday, Kering shares closed at a little over €425, valuing the French group at €52.8 billion. It’s possible the share price could slide further after its third-quarter sales trading update on Oct. 24. Analysts expect luxury valuations to reach a low point this results season if companies make no positive comment about the outlook for year-end sales and beyond.

LONG-TERM VIEW

Mayhoola takes a long-term view. It does not care much about stock market gyrations. Its ambition is to remain a strategic investor in the luxury space for years to come. “Many people make the assumption that we should form a group in the same way as LVMH and Kering if we want to be long-term investors and investors in more than one brand,” CEO Rachid told Miss Tweed in an interview at Valentino’s headquarters in Place Vendôme in Paris. “That is not the only way to achieve our ambition in an evolving environment.”

Indeed, Mayhoola’s plan changed from preparing an IPO, before and after the pandemic, to becoming Kering’s strategic partner and, eventually, shareholder. “Our plan was to IPO Valentino when the timing was right to prepare the company for the next chapter,” Rachid told Miss Tweed. “We had this intention for some time, and when we attempted to proceed in the past, we had to postpone due to external market conditions.”

“The purpose of the IPO was to improve the governance of the company, to have better tools for talent incentive mechanisms thanks to instruments like stock options, and to have a currency in the form of shares that would allow for broader strategic considerations. This opportunity with Kering came in that context.”

“The deal structure evolved in a constructive way to address the goals of both parties also thanks to the strong and positive relationship that François-Henri Pinault and myself built together. The deal we have made achieved the same strategic goals we identified as the ones we would pursue with an IPO of Valentino.”

For the moment, it looks like all options remain open.

Valentino and Balmain have been hit by the downturn, industry sources say, particularly their wholesale businesses. Valentino’s turnover generated in its own directly operated stores was up a few percentage points between January and August, industry sources say. Mayhoola is now focused on boosting Valentino’s performance to make the bride more attractive for Kering. The strategy is to move away from its trademark rock studs shoes and bags and get consumers to adopt some of its new products such as the moon-shaped tote with a big V in the middle of its chain handle.

“We don’t have to be a controlling investor,” Rachid said. “We want to be in a position where we can guide, so that we can realize our long-term vision of being part of the luxury leadership in the world and be one of the influential players.”

GUCCI

Mayhoola is keen to partner with Kering, but is also aware the group has many brand and management issues to solve. Sorting out Gucci is a priority since it generates the bulk of profits. Buyers and fashion critics were underwhelmed by the first show of its new designer Sabato De Sarno in Milan last month, as Miss Tweed reported. However, some industry observers believe it could provide a solid basis on which the Italian designer could build for the future. The good news is that there is a lot of potential upside. If De Sarno puts out something that impresses and wows consumers, that will make investors optimistic about future sales growth and, eventually, lift Kering’s share price.

Kering’s former managing director Jean-François Palus, Pinault’s right-hand man, has taken the helm at Gucci and moved to Milan in September. It may be some time before he hires a replacement, industry sources say. Kering conducted a major management reshuffle in July, appointing Palus as Gucci CEO and the Saint Laurent boss Francesca Bellettini as co-CEO of the group, together with the former finance director, Jean-Marc Duplaix. Bellettini runs the brands and decides on strategy while Duplaix looks after operational matters.

In that reorganization, some external influence from Mayhoola could be salutary. Indeed, Kering could benefit from Rachid and his teams asking tough questions and acting as checks and balances for the group. However, Mayhoola is not yet in a position to do so, and it does not plan to let Kering interfere with Valentino.

“Our agreement is clear that Mayhoola, as majority shareholder, will keep managing the company in the next five years, in line with the strategy that we have pursued so far,” Rachid said. “Therefore, there is no disruption or ambiguity in terms of the management of the business. Of course, we look forward to benefiting from Kering’s extensive knowledge and experience. Their resources will create synergies to make Valentino even more successful than it is today.”

Kering and Mayhoola have remained elusive about what these synergies or “extensive” knowledge and experience would be and how they would work together in practice. Industry insiders suggested that this would include things such as securing good locations for boutiques or negotiating advertising budgets. For now, for reasons of competition, Kering does not want to be seen to be helping Mayhoola since it will own only 30 percent of Valentino, not enough to justify any form of strategic collaboration.

BALMAIN

What is not clear is what will become of Balmain, and also Pal Zileri, Mayhoola’s Italian menswear brand which been losing money for years. Pal Zileri is estimated to generate less than €20 million and continues to make a loss, industry sources say. However, Balmain is a much more attractive asset.

When Mayhoola bought Balmain in 2016 for about €460 million, it generated some €130 million in annual sales. Now, it makes about €350 million. Its underlying profitability (Ebitda) is estimated at a little over 10 percent of turnover, or between €35 and €40 million. Using current industry multiples, Balmain is estimated to be worth between €1 billion and €1.2 billion, or an enterprise value of a little more than three times annual sales, which is what Kering is on now. If you use Balmain’s estimated underlying profitability, or Ebitda, of around 10-15 percent, that implies around €38 million, give or take, and multiply it by 30, that gives a valuation of €1.14 billion.

The deal between Kering and Mayhoola, signed in July, established Valentino’s enterprise value at around €6 billion and an equity value of €5.6 billion, which excludes net debt. It is understood that, when the moment comes for Kering to buy the rest of Valentino, likely to take place within five years but maybe sooner, the same multiples apply, industry sources said.

Kering paid 16 times Valentino’s 2022 Ebitda of €350 million, using international accounting standards, or IFRS. However, when deducting the rent Valentino pays for its boutiques around the world, that profitability figure comes down to €195 million, which means actually 31 times, industry sources say. Under the terms of the deal, it is understood that the same multiples will apply when Kering buys the rest of Valentino. It is not clear how much will be paid in shares and in cash.

What about Balmain? The French brand, founded in 1945 by Pierre Balmain -- around the same time as Dior -- is known for its pricey six-button military-style jackets and its embroidered evening dresses. It also sells €1,500 black leather B-Buzz bag with a golden “B” buckle and €1,000 spacecraft-looking Unicorn sneakers in leather and Neoprene. Balmain generates a significant proportion of business with multi-brand retailers with whom it has around 350 points of sale. When Mayhoola acquired it, it had fewer than 10 boutiques. Now it has about 30 worldwide, industry sources say.

Balmain has been enjoying steady success. First, from 2006 to 2011 under designer Christophe Decarnin, who famously resigned due to a burn-out, and then under Olivier Rousteing who became one of the fashion industry’s youngest creative directors at the age of 25 in 2012. Yves Mathieu-Saint-Laurent was 21 when he became creative director of Dior’s Haute Couture in 1957.

Rousteing’s active role in social media has been instrumental in boosting the brand’s profile and aura. The designer boasts nearly 10 million followers on Instagram and regularly posts photos of his jet-set lifestyle and Balmain events, attended by celebrities such as Beyoncé and Kim Kardashian.

Now the designer is spearheading a push into beauty after a license deal was signed with the Estée Lauder Companies in 2022 which includes cosmetics, fragrance and make-up. Balmain is expected to launch the new line in September 2024. The brand recently posted a teaser on You Tube on the topic.

For now, Kering has not expressed any interest in acquiring Balmain. Also, we will have to see what Kering’s Alexander McQueen becomes after 25 years of collaboration with designer Sarah Burton, who was creative director for half that time. Her replacement is Sean McGirr, 35, a Central Saint Martins graduate who was in charge of ready-to-wear at JW Anderson. It’s not yet clear how McQueen’s new designs would sit next to a brand like Balmain.

The two brands are both into evening wear, but McQueen’s accessories business is more developed than Balmain’s.

So, if Balmain is worth more than €1 billion and Valentino now €6 billion, that makes more than €7 billion. At today’s valuation, if Kering has a market capitalization of €52 billion, that gives you a stake of about 13 percent, which is not negligible. However, that scenario is unlikely to materialize.

What could happen is that Mayhoola leaves Balmain out of the equation and sells only 70 percent of Valentino and agrees to be paid partly in Kering shares. Depending on the terms, that could give Mayhoola a potential stake of about 8-9 percent, some analysts estimate. However, whatever the size of the holding Mayhoola ends up owning, the Qatari company would become Kering’s second-biggest shareholder after the Pinault family, which has a 42 percent stake and controls 59.3 percent of voting rights.

One could ask if there are political implications in letting the Qatari royal family become the No. 2 shareholder in a French fashion champion. Not necessarily. The Qataris already own a good chunk of prime real estate in key cities, such as Place Vendôme and the Champs Élysées in Paris and the Empire State Building in New York. They also have the department stores Printemps and Harrods and a small percentage stake in LVMH. These investments are part of a strategy to diversify into sectors other than oil and gas, for the day when reserves run out. Talking about the Qataris’ presence in real estate and in luxury generally, a senior industry told Miss Tweed on condition of anonymity: “It’s true that the Qataris have been part of the picture for a while.”