What Michael Kors’ $2.12-Billion Purchase of Versace Means for the Market, Fashion Industry
On September 20th of this year, fashion industry giants Michael Kors Holdings Limited (“Michael Kors”) and Gianni Versace S.p.A. (“Versace”) issued a joint press release announcing that Michael Kors would purchase Versace for $2.12 billion. (Katina Metzidakis, Business Wire). The transaction is expected to be completed in Michael Kors’ fourth quarter, which ends April 1, 2019. (Michael Kors Holdings Limited, 2018 Annual Report). When the transaction is complete, the company will be renamed Capri Holdings Limited (“Capri”), after the famed Italian island “long recognized as an iconic, glamorous and luxury destination.” (Katina Metzidakis, Business Wire). This post provides an overview of the transaction and its anticipated effects.
Founded by Gianni Versace in 1978, Versace has remained a household name for European luxury and high fashion. (Bill Chappell, NPR). However, in recent years it has suffered as a result of lack of accessibility. For many luxury brand customers, “makeup or accessories are the entry point, areas where Versace lags.” (Samantha Tse, CNN). Further, a recent report found that while Millennials comprised the majority of Versace’s website traffic, relatively few ultimately made purchases, perhaps due to the brand’s focus on clothing. (Pamela N. Danziger, Forbes). In 2014, private equity firm, Blackstone Group, contributed $287 million in financing towards an initial public offering (IPO) for Versace in exchange for a 20% stake in the company and a seat on its board. (Nicola Clark, NY Times). However, despite this additional funding, no IPO took place, as Versace could not compete with European luxury rivals. (Stephen Wilmot, The Wall Street Journal).
Michael Kors, the individual, founded his namesake fashion and design company in Manhattan in 1981. (Bill Chappell, NPR). The company became popular for its expensive handbags that were more accessible to the average American consumer due to their availability in department stores. Id. Notably, in summer 2017, Michael Kors bought luxury shoe and accessory producer Jimmy Choo for $1.2 billion, making its first strategic move to become an American-backed, global, luxury parent company. Id.
News of the deal has been met with surprise, if not outright criticism. Critics say Versace’s glory days have long passed and are quick to point out its somewhat meager $17.5 million in profits in FY 2017. (The Fashion Law). Fashion industry insiders speculate it may be the Italian company’s trademark and brand, particularly its dynastic family story, that motivated Michael Kors to shell out roughly three times sales for Versace. (Stephen Wilmot, The Wall Street Journal). Analysts worry that absorbing a brand like Versace into a company known for affordable luxury may destroy shareholder value. Indeed, on September 24th, just days after news of the deal broke, Michael Kors’ stock value dropped by 9%. Id.
Despite these concerns, Michael Kors’ Chairman and CEO, John Idol, believes that Versace will grow to over $2 billion in revenues under Capri’s steering. (Bill Chappell, NPR). Idol plans to invest heavily in Versace by opening an additional 100 stores around the globe and improving its internet accessibility and social media presence. (Pamela N. Danziger, Forbes). Additionally, Idol plans to shift Versace’s focus from clothing to accessories and footwear, with hopes that these will come to comprise 60% of Versace’s total revenue, up from 35% currently. Id. Perhaps of some comfort to Versace lovers is the news that Donatella Versace, who has been at the company’s helm since her brother’s tragic death in 1997, will remain Versace’s creative director after its acquisition. (Samantha Tse, CNN). Further, Donatella, her brother, Santo, and daughter, Allegra will receive approximately $177 million in Capri shares – giving the family some influence in the new company. (Bill Chappell, NPR).
With its pending acquisition of Versace, Michael Kors seems determined still to forge ahead in its quest to compete with luxury industry titans at a global level. While Michael Kors’ share values have yet to recover from the initial hit the company took after the deal was announced, and many have speculated that Michael Kors is over-paying for Versace, only time will tell whether the deal is a wise one for either corporation.