France's LVMH will take over Italy's Bulgari in a 3.7 billion euros ($5.19 billion) deal to add luster to the No.1 luxury group's jewelry business and bring it more exposure to emerging markets.
The offer, which priced Bulgari's shares at a 60 percent premium to its average level over the last month, could herald the return of consolidation in the luxury market, which bounced back from the 2009 slump much faster than analysts expected.
Bulgari will benefit from LVMH's global retail network, improve margins through cost-sharing and help the luxury group close the gap with bigger watch and jewelry companies Richemont , whose shares rose 2.9 percent, and Swatch .
Analysts said the price was high but justified by the savings. The acquisition of family-controlled assets, which did not happen often, usually meant buyers had to pay a sizeable premium to the market to convince families to sell.
The deal values Bulgari on a ratio of enterprise value to sales of about 3 times, which compares with other potential takeover candidates Burberry which is on 2.7 times and Tiffany which is on 2.3 times using forward sales estimates.
This multiple is in line with historic deals in the sector and the recent acquisition of (online luxury fashion retailer) Net-a-porter by Richemont, which was roughly 3 times enterprise value to sales, Deutsche Bank said in a note.
Founded by billionaire Bernard Arnault, LVMH is built solely on acquisitions. Its brands now include Louis Vuitton handbags, Chaumet and Fred jewelry, Celine and Kenzo fashion, Hennessy cognac and Moet & Chandon champagne.
Bulgari is one of the best known jewelry brands in the world, with lots of potential to grow on the back of LVMH's global distribution reach and financial muscle, Bernstein luxury analyst Luca Solca said.
The deal will double LVMH's watch and jewelry business to make up 10 percent of its sales and about 6 percent of operating profit, analysts estimated.
Analysts believe rival luxury groups could embark on a fresh consolidation wave, encouraged by the strong sales visibility they are getting from big emerging luxury markets such as China.
We believe 600 million new consumers are set to enter the (luxury) market by 2025. In our view, the luxury goods market could grow at 2.2x GDP to 2025, becoming a trillion dollar industry, Goldman Sachs said in a note on Monday.
We forecast average 2011-14 top-line growth of 16 percent across our luxury coverage.
Bulgari , which was established in 1884, had long been seen as a potential target having weakened its finances by embarking on big store investments when its sales were falling. There was regular speculation Switzerland's Swatch Group could take it over.
The transaction comes after LVMH built up a 20.2 percent stake in smaller rival Hermes which, like Bulgari, is family controlled. That move prompted Hermes to fight back by creating a controlling family holding within the group to block LVMH's advance.
LVMH will buy 50.4 percent of Bulgari, issuing 16.5 million shares in exchange for 152.5 million shares held by the Bulgari family, the companies said in statements on Monday.
The French group also will launch a buyout offer for the rest of Bulgari shares at 12.25 euros ($17.14) a share. The shares closed at 7.59 euros on Friday and the offer carries a 59.4 percent premium over the average price of the last month.
The deal values the jeweler at about 3.7 billion euros based on Friday's closing price of 111.55 euros for LVMH shares and using 12.25 euros for the free-floating Bulgari shares, according to Reuters calculations.
Kepler analyst Jon Cox said the deal strengthened LVMH in the hard luxury segment for watches and jewelry.
Whether this leads to further M&A I am not sure, given attractive assets are pretty limited in the watch-making sense. Rolex, Patek and Chopard are owned by families and foundations and are in far stronger shape than Bulgari, he said.
Shares in Bulgari were up 57.5 percent at 11.97 euros by 1241 GMT. LVMH shares were little changed at 111.65 euros after earlier losing almost 2 percent.
Under the deal, the Bulgari family will become the second-biggest family shareholder in LVMH. Chief Executive Bernard Arnault's Groupe Arnault holds 47.6 percent of LVMH.
The Bulgari family will name two representatives to the LVMH board. Bulgari Chief Executive Francesco Trapani will join LVMH's executive committee and take on management of LVMH's watches and jewelry activities in the second half of the year.
This should be a catalyst for possible targets in the sector, a French broker said. As such, we would (see ...) that as a positive for Burberry Group Plc notably. Burberry shares were up 3.6 percent.
Trapani told Reuters last summer that his family had no plans to relinquish control of the group.
(Additional reporting by Nigel Tutt and Silke Koltrowitz, Editing by David Cowell)