Michael Kors’ acquisition of Versace
Wenqian Zeng, London 08/03/19
LSE SE Business and Finance Guild, London School of Economics
On 25th September 2018, the American brand known for its affordable handbags Michael Kors acquired the “epitome of Italian glamour” Versace for US$2.1 billion and changed its name to Capri Holdings with the intention of building America’s first global luxury fashion group (Vogue, 2018). Founded in 1981 and named after founder and current Chief Creative Officer/Designer Michael Kors, it made its money through targeting middle-class households. By contrast, Versace, founded in 1978 by Gianni Versace who was assassinated in 1997, built the brand into a symbol of Italian luxury dressing women such as Princess Diana and Elizabeth Hurley. This seemingly unlikely match has stirred up some controversy from the day John D. Idol, Michael Kors’ Chairman and CEO, announced the acquisition.
Kors’ effort to build its own conglomerate rivalling European conglomerates LVMH (Moet Hennessey Louis Vuitton) and Kering began from firstly acquiring Jimmy Choo for US$1.2bn in 2017. Now with the iconic Versace under its name, Capri Holdings is one large step closer to its goal. Idol described this deal as a “milestone” for Capri Holdings (Vogue, 2018). The Versace family owning 80% of Versace will now be shareholders of Capri and receive 150 million euros of purchase price in Capri shares (Michael Kors Holdings Limited, 2018) with Donatella Versace remaining as creative director and Jonathan Akeroyd as chief executive.
However, several difficulties and controversies have emerged from the deal. Chen and Sherman (2018) stated that the price of the acquisition is in fact 2.5 times Versace’s current revenue and 22 times its EBITDA. This questions whether US$2bn including debt is too high for a company that has been relatively unstable with profits and sales in the last couple years even with its world-famous name. Furthermore, a more immediate consequence was experienced by Kors when shares decreased by 8% the day before the announcement due to rumours of the deal prior to the acquisition (Vogue, 2018). Comparing Versace with rival brands such as Louis Vuitton and Gucci, its sales revenue of under $1bn positions Versace as lacking behind hugely.
Nevertheless, Capri believes this acquisition will “enhance[s] the company’s economic value and will drive improved long-term shareholder value by accelerating long-term revenue and EPS growth potential” (Michael Kors Holdings Limited, 2018). In order to achieve this goal, Idol has plans to expand men’s and women’s accessories and footwear from 35% to 60% of revenues, to build on Versace’s runway momentum, building out e-commerce and expand its stores from 200 to 300 worldwide, penetrating into the Asian market including Japan, South Korea and China (Vogue, 2018). Michael Kors Holdings Limited (2018) has also reported the target of US$8bn revenue; this includes US$2bn from Versace, US$1bn from Jimmy Choo and US$5bn from Kors. Donatella’s response to the projection “we believe that being part of this group is essential to Versace’s long-term success” and the assertive closing comment “my passion has never been stronger” reassures the public of the challenging goal (Vogue, 2018).
The risks and uncertainties in the deal mainly surrounds the future of the two brands - how the upscale Italian house will be able to adapt to the more mainstream American brand. Throughout fashion history, luxury brands take pride in their national heritage, culture and craftsmanship, however, the purchase will raise questions about brand dilution (Vogue, 2018). This contributes to the fear of losing the originality of Versace.
Former CEO of Versace, Gian Giacomo Ferraris, once described Versace as a “sleeping giant” which if “in some way [we could] awaken this giant – my god, you have a power” (Amed, 2015). Despite the speculative acquisition, if Jimmy Choo is able to do well under the umbrella of Capri Holdings Limited, Versace should hopefully be no different. The group’s influence on Versace will take time and if the strategies proven successful, not only will it gain financially but will also transcend the traditional boundaries in fashion that contributes to class division and inaccessibility of luxury clothing.
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