The end of the pandemic is likely to see fashion and luxury M&A opportunities. The big focus: brands that tap younger consumers.

After months of quiet and stalled deals, 2020 closed in a flurry of M&A (mergers and acquisitions) activity, setting a pace that is likely to continue in 2021. That’s the view of analysts across the luxury sector.

“Covid has added to the pressure from demand going to a very concentrated number of winning brands,” says Francesca Di Pasquantonio, head of luxury goods, equity research at Deutsche Bank. “This creates the conditions that are favourable to selling to others, merging with others or joining forces to be able to scale, but also to leverage expertise or talent.”

Three acquisitions totalling nearly $20 billion dominated the final quarter of 2020. The deal of the year was finally closed in October, when LVMH agreed to pay a slightly reduced $15.8 billion for US jewellery brand Tiffany, the luxury sector’s biggest ever deal. In November, VF Corporation, owner of Timberland, Vans and The North Face, bought streetwear brand Supreme for $2.1 billion. And finally, in early December, Moncler acquired menswear brand Stone Island for $1.4 billion.

Expect more of the same in 2021. Borrowing costs remain extremely low by historical standards, to the advantage of companies in a strong financial position seeking to invest. As government support schemes are wound back in a post-pandemic world, weaker brands with consumer appeal will come under pressure. Meanwhile, private equity has built a significant war chest over 2020 — and luxury fashion remains an attractive draw.

Tommaso Nastasi, partner at Deloitte Italy, which monitors luxury transactions, outlines the big three trends for M&A in 2021: conglomerates looking for an opportunity to consolidate, luxury brands stepping up vertical integration by investing in distressed parts of their supply chain, and a focus on investment in digital expertise and the APAC region.

Consolidation is a long-term trend in the luxury sector that is likely to continue, says Di Pasquantonio of Deutsche Bank. “The trends on the balance sheet and free cash flow generation driven by the business models, which generally make luxury companies very highly profitable… really justify the use of cash to build external growth on top of organic growth.”

Short-term and long-term goals both play a part. LVMH is looking for growth over the long term with its acquisition of Tiffany, seeking to replicate its 10-year development of jewellery brand Bulgari — LVMH has doubled revenue since buying the Italian company in 2011.

Other acquisitions are geared towards brands that are hot and offer quick returns. “The main focus of M&A at the moment is on brands most exposed to the youngest generation,” says Paola Carboni, analyst at Italian bank Equita, citing the purchases of Stone Island, Supreme and Italian streetwear brand GCDS. “No one is rushing to buy more mature brands. Turning them towards younger generations could be an opportunity to create value, but it is difficult to achieve at the same time.”

Away from the world of high-profile brands, companies are looking to increase expertise, diversify their offerings and strengthen their supply chains. LVMH CFO Jean-Jacques Guiony highlighted to analysts the appeal of Tiffany’s vertically integrated diamond supply chain. The trend of luxury groups integrating their Italian suppliers directly into their businesses is likely to continue, says Nastasi. Investment in digital technology and sustainability initiatives will be a constant theme of 2021.

Private equity is eager to invest. Last November, Bloomberg reported that private equity firms had $1.6 trillion to spend. Luxury and high-end fashion brands are likely points of interest: a Deloitte survey in 2019 of 60 leading private equity firms confirmed the enduring appeal of fashion and cosmetics. Despite the pandemic downturn, the fundamental appeal of a strong return on investment from luxury brands remains in place.

Nastasi says private equity investors from the Middle East and China are particularly interested in smaller, newer brands — “contemporary fashion brands with a good value proposition and good product”. Brands that resonate with younger generations are particularly highly prized.

Some leading Chinese firms could have bigger ambitions still: Alibaba and Richemont announced plans to invest $300 million each in Farfetch and $250 million each in Farfetch China “to provide luxury brands with enhanced access to the China market as well as accelerate the digitisation of the global luxury industry”. Alibaba also took a 6.1 per cent stake in leading travel retailer Dufry in October.

Investment could also come from unexpected quarters, including the mid-market. UK high street tycoon Mike Ashley has increased his Frasers Group stake in Mulberry, combined with expansion of luxury multi-brand retailer Flannels.

Stores may close and assets may disappear, but luxury brands with pedigree tend to find a way forward under new ownership. One of the biggest luxury casualties of 2020 — US retailer Barneys — is planning to open a unit in 2021 located within Saks Fifth Avenue’s New York flagship following its collapse and purchase by Authentic Brands Group.

But conventional retail may not be where the big-thinking action is. Nastasi notes a powerful trend for luxury brands to pivot from a product focus to meet consumers where they are now, investing in everything from digital technology to experiential luxury. The goal — “to become more customer-centric, leveraging also the digital enablers,” as Nasasi puts it. “This is a big changeover for the industry.”


Source: Vogue Business