It’s
the latest speculation. It has been formulated as a possibility by
Exane BNP Paribas, and it could make some sense after the recently
reported failure of merger discussions between Essilor International
and the Luxottica Group. The two eyewear industry giants have been
very respectful of each other until now, avoiding any intrusion into
each other’s territory, but this would change if Essilor took over
the Safilo Group. Essilor may want to take advantage of Safilo’s
relatively depressed share price, caused by Kering’s recent
decision to gradually take ownership of its eyewear licenses,
managing them directly. Safilo is currently trading at around €12 a
share; down from a 52week high of €18.46 reached a year ago, giving
it a stock market capitalization of about €755 million. Its share
price fell by 25 percent when Kering announced the creation of Kering
Eyewear.
As
previously reported, after 20 years of cooperation, Kering has
decided to terminate its current Gucci license earlier than
scheduled, in December 2016, although it has confirmed that it will
compensate Safilo for the loss of this important business. It will
pay €90 million in three equal installments, the first of which was
paid on Jan. 12, and it will continue to rely on Safilo for a while
for product development, manufacturing and supply of the products.
Five other Kering brands managed by Safilo – Bottega Veneta, Saint
Laurent, Alexander McQueen and McQ - will be internalized by Kering
Eyewear as early as next June 30.
Officials
at Essilor and Hal, the largest shareholder in Safilo, declined to
make any comments on Exane’s Jan. 15 report, which has been widely
publicized in the French and Italian press during the last few days.
Exane points out that such a takeover would materially change
investors’ perceptions of Luxottica, which was commanding a high
valuation with a market capitalization of €22.4 billion when the
report was released, giving it a price/earnings ratio of 26.3 times
based on a share price of €47.2.
Still,
Luxottica’s share price moved up despite the report, reaching
€49.90 on Jan. 20, after the publication of Luxottica’s sales
results (see the previous article). Its share price fells lightly in
subsequent days, but then picked up again and opened this morning at
€49.92, close to a 52-week high of €50.20 in spite of its recent
change of management. The lack of a decline in the share price of
Luxottica or an increase in the share price of Safilo after the
publication of there port may indicate that investors don’t really
believe in the scenario outlined by Exane. The investment company
explains why toward the end of its analysis.
According
to Exane, Essilor could be interested in acquiring Safilo to
reinforce its position in sunglasses and to move into prescription
frames as part of its exploration of new growth areas outside its
core ophthalmic lens business, where it already has a strong
position, giving it less room for further expansion. Essilor is
probably interested in acquiring a supplier of prescription frames
and sunglasses because it has been investing lately in sunglasses and
online retailing, where it sees possibilities for growth of more than
6 percent and 14 percent a year, respectively, compared with 3-4
percent increases for prescription lenses. Its growth in the
ophthalmic lens sector is being challenged by Hoya, which has major
ambitions in the area. Essilor has been careful not to enter the
higher-priced segment of the sunglass market, which is dominated by
Luxottica, but it may come to it through Safilo. We remember that
Luxottica owned Logo Eyewear many years ago.
Safilo
is already working together with Essilor through a licensing
agreement signed in May 2013 for Polaroid branded sun lenses. This
could facilitate the integration, Exane says. On the other hand,
Exane feels that Essilor may fear a direct confrontation with
Luxottica as it probably is its largest single client, representing
about 5 percent of its annual sales. It also points out that it may
be too soon for such a mega-deal, as Essilor is still digesting major
acquisitions such as those of Transitions, Costa and Coastal.com.
Purchasing Safilo for €1 billion would lift Essilor’s net debt to
two times its Ebitda. Exane believes that a merger between Essilor
and Luxottica would make more sense, and that any interest displayed
in Safilo could be the French giant’s way to convince Luxottica’s
shareholders to come to the negotiating table.
