Where Private Equity meets fashion

On January 5th, Catterton, the leading consumer-focused private equity firm, together with LVMH and Groupe Arnault, respectively, the largest luxury conglomerate in the world and the family holding company of the founder, announced they have entered into an agreement to merge part of their business to create a new entity, named L Catterton.

After completion of the deal, L Catterton will combine Catterton’s operations in North and Latin America with those of L Capital and L Real Estate, LVMH’s private equity arms, in Europe and Asia. Under the terms of the agreement, the partners of the new venture will own 60% of the fund, while the remainder will be jointly owned by LVMH and Groupe Arnault. The price and structure of the transaction were not disclosed.

L Catterton will therefore become the largest global consumer-focused private equity group, with $12 billion in assets under management and a focus on consumer brand buyouts, pursuing its fund strategy in North and South America, Europe and Asia, together with its real estate activity. L Catterton would then capitalize on the two funds history, expertise and unique global network to build value in consumer investments in all major markets.

PLAYERS’ PROFILES:

Catterton, the Brand Equity builder:

Catterton is the largest and most experienced consumer-focused private equity group in North America. Founded in 1989 as Catterton-Simon Partners by Frank Vest and Michael Chu, it has $5.5 billion of equity capital dedicated to growing middle market companies and emerging, high-growth enterprises. The group invests in all major consumer segments, including Food and Beverage, Retail and Restaurants, Consumer Products and Services, Consumer Health, Media and Marketing Services. Catterton’s investments includes: Restoration Hardware, CorePower Yoga, Outback Steakhouse, Noodles & Company, Protein Bar, Bruxie, Snap Kitchen, Build-A-Bear Workshop, Wellness pet food, Kettle Foods, Odwalla and P.F. Chang’s. Catterton’s portfolio companies benefit from its wide network of strategic industry contacts, active lending institutions, recruiters and consultants providing market and products expertise, access to new customers and valuable investment and commercial banking capabilities.

In its first five years, Catterton focused exclusively on buyouts, acquisitions, recapitalizations and turnarounds in the beverage industry. Following this early stage, it acquired consumer products companies such as OSI Restaurant Partners (Outback Steakhouse, Restoration Hardware) and Noodles & Company.

From 2004 to early 2015, investments in Catterton’s buyout funds have returned 1.6 times the money committed (net of fees), while separate growth funds run by the firm score a 1.5 times return. One Catterton fund from 2010 returned 2 times the money invested for the California Public Employees’ Retirement System, the biggest US pension scheme.

L Capital and L Real Estate, the private equity operative units:

L Capital private equity funds invests in leading companies in attractive consumer categories across Europe and Asia, including Beauty and Wellness, Fashion and Accessories, Food and Beverage, Media and Entertainment, and Special Retail. L Capital – Europe, founded in 2001 under the sponsorship of LVMH Group and Group Arnault, soon positioned itself as a top-tier investor in Europe with the mandate to invest in “affordable luxury” that was below the prices within LVMH’s brands.

Headquartered in Paris, with offices in Milan, Madrid and London, L Capital’s main strategy is based on strategic investments in companies with sales between €30 – €400 million with a strong growth potential, and/or at their initial development phase, through leveraged buyouts or growth capital injection. Its focus is on four main sectors: Personal Care and Well-being, Personal Equipment, Home & Family Equipment and Selective Retailing. L Capital’s main commitment is to increase the value of its portfolio of companies (currently around 28) by expanding on an international level their distribution networks and products offered. L Capital – Europe’s investments include: Nutrition and Sante, Zanotti, Ba&sh, Sandro and Maje, Gant, Cigierre and Pepe Jeans & Hackett.

In 2009, L Capital – Asia, a new separate independent platform, was created, with headquarters in Singapore and regional offices in Hong Kong, Shanghai, Mumbai and Melbourne. L Capital – Asia is the largest consumer- focused private equity firm in the country, whose main objective is to capitalize on the high consumption growth in Asian emerging markets. L Capital – Asia’s investments include: 2XU, Charles & Keith, Marubi, Bateel, Sasseur, Asiaray Media and Emperor Watch and Jewelry. Both L Capital – Europe and – Asia take advantage of synergies by sharing market knowledge, investment strategies, as well as organizational proceedings.

L Real Estate is a unique developer of mixed use projects anchored by luxury retail, with headquarters in Luxembourg and regional offices in Paris, Hong Kong and Miami. L Real Estate’s investments include Miami Design District and G6 in Ginza – Tokyo.

LVMH Group, the cutting-edge giant:

LVMH Moët Hennessy Louis Vuitton is the world-leading French multinational in luxury products, created in 1987 following the merger of Louis Vuitton and Moët Hennessy, to which it owes the name. LVMH is the only group having such a large portion of the luxury market: with 70 Houses that create high quality products and a retail network of over 3,860 stores worldwide, it operates in five major sectors: Wines & Spirits, Fashion & Leather Goods, Perfumes & Cosmetics, Watches & Jewelry and Selective Retailing.

In 2015, LVMH recorded revenue of €35.7 billion, an increase of 16% over the previous year. One of the major highlights of the last FY was the strong progress and influence in Europe, the US and Japan. The group share of net profit jumps to €3.6 billion, which represents a 20% increase YoY, excluding the capital gain realized in 2014 after the disposal of Hermès equity stake. Its major shareholder is Christian Dior, owning a participation of 40.9% and approximately 60% of the group’s voting rights. Bernard Arnault is the Chairman and Chief Executive Officer of LVMH group.

Graph 1: LVMH Selected P&L data, last 3FY (EUR mln) (source: company’s financial statements)

LVMH’s fashion and leather goods division includes prominent brands, such as Louis Vuitton, Kenzo, Fendi, Givenchy, and Céline, while the Perfumes and Cosmetics division is made of prestigious names like Christian Dior, Givenchy, and Guerlain. Its wine and spirits group similarly includes most renowned brands, such as Dom Pérignon, Hennessy, Belvedere, Krug, and Moët & Chandon. The company also owns luxury retailers, including a majority stake in DFS Group Ltd., a bunch of duty-free stores, and Sephora, a cosmetics and perfume chain. Concerning the Watches and Jewelry division, the conglomerate created a joint venture with the world’s leading diamond dealer De Beers Diamond Jewellers.

Graph 2: LVMH (blue line) vs. S&P Global Luxury Index (red line), last 52-weeks (source: Yahoo! Finance)

THE TRANSACTION:

L Capital and Catterton share the same appetite for international expansion: while the former, heavily exposed on the European and Asian markets, was considering investing into the US, the latter was increasingly looking to the Old Continent and the Far East. Given the existing connection between them, dating back almost two decades ago, since 1998, the merger seems the right move for both to improve return by leveraging each other’s expertise and cutting “dry powder” hidden cost (that is, the cost of cash kept on hand to exploit investment opportunities).

Both L Capital and Catterton wanted to capitalize on new markets to boost growth in their portfolio companies. Capturing the knowledge about their respective regions was the impetus behind the deal, in a segment, such as the luxury one, where a physical presence is fundamental, further triggered by the increasing ease with which it is possible to establish offices in those regions. Hence, the decision of combining and create the leading consumer-focused private equity firm.

L Catterton will be headquartered in Greenwich, CT and London, with regional offices across Europe, Asia and Latin America. Michael Chu and Scott A. Dahnke, the Managing Partners at Catterton, will become the global co-chief executives at L Catterton, while each fund will continue to be managed by its own dedicated team in their respective locations.

A thrilled Mr. Arnault, Chairman and CEO of LVMH and Groupe Arnault, commented: ”L Catterton will provide investors with a unique value creation platform, bringing together our global network and industry expertise with Catterton’s long-standing operational approach to building value in consumer investments”

At Catterton, they expect this combination to further their mission of investing in high growth opportunities in categories with attractive consumer economics. Mr. Chu addressed the deal and the partnership with LVMH and Groupe Arnault as a transformative combination, looking forward to benefitting from the strength and global reach of the team at L Capital and L Real Estate as they continue to seek out investment opportunities with significant growth potential.

Mr. Dahnke reported in a statement: “The globalization of media and technology, combined with increasingly permeable geographic borders, is driving rapid consumer growth on an unprecedented global scale. Together, Catterton and L Capital will create a global consumer investing franchise with unmatched access to resources in the industry”. The transaction is expected to close early in 2016, subject to customary regulatory and certain investor approvals.

CONCLUSION:

Overall, the merger has a positive outlook: the deal appears to be very effective in exploiting potential synergies between Fashion and Private Equity, by combining LVMH, L Capital and L Real Estate’s expertise and global reach in the consumer and luxury retail industries with Catterton’s achievements in building value and growth in the private equity industry. Moreover, the common culture of the two parties serves as a key point of contact: both players are focused on mid-cap firms internationally (recalling L Capital mandate to invest in “affordable luxury”) and their merger will offer a faster access to new markets, enhancing growth potential, operational cost saving and the potential free-up of capital stemming from the reduction of the combined “dry powder”. In conclusion, consumer investments seem to be still very appealing and the leveraging of economy of scale could represent the answer to a sluggish growth of world economy.

Sources: Companies’ websites, press release, Dealbook, FT