Public Prada?

Posted by: Charles DuBow on December 21

This week Italian fashion house Prada SpA announced that they had selected Goldman Sachs Group Inc., Intesa Sanpaolo SpA and UniCredit SpA to take it public some time next year. According to a report in Bloomberg the Milanese company, famous for it leather products and decontructed clothes, could be valued at around 5 billion euros ($7.2 billion) and would be the biggest IPO ever seen in the luxury goods industry.

Why would Prada want to go public? There are very few stand-alone public companies in the fashion business. Some of the biggest--such as LVMH, which owns, among other things, Givenchy, Fendi and Marc Jacobs--are large, diversified corporations where cash-cow divisions can support money-losing critical darlings. These corporations have the management, money and marketing skills to turn small design shops into global powerhouses.

Another type of publicly-traded fashion house would be Hermes. The Paris-based luxury company is listed on the Paris Stock Exchanges and other European bourses though not on the NYSE or Nasdaq--but voting stock is carefully kept in the hands of the Hermes family.

Alternately, a number of design houses--such as Valentino or Tommy Hilfiger--are wholly or partly owned by deep-pocketed private equity groups.

The problem is that there are even fewer big private design houses left anymore. Chanel, Armani, Versace, Benetton and a handful of others are all that is left. It is getting just too expensive to start up a new fashion brand without the significant financial backing
that a private equity, a rich parent company or a public offering can provide.

Equally important, the luxury sector is becoming increasingly competitive and comprehensive. As new markets for luxury products and services open up in Russia, China, India and elsewhere, companies like Prada need the money to establish a presence there--building a store, hiring staff, logistics, marketing, etc., etc.--or risk beingh shut out of those markets. Moreover, no longer do companies focus only on one category, such as shoes or bags or clothes. Now they need to be in all of them.

The attraction of an IPO, of course, is that it not only raises capital to fuel expansions and acquisitions--Prada also owns Miu Miu and Church's shoes and recently sold Helmut Lang and Jil Sander--but it helps keep control in the hands of the Prada family. (The company was founded in 1913 as a leather goods company by Mario Prada, grandfather of current owner Miuccia Prada, who inherited in 1978 and whose husband, Patrizio Bertelli, is the CEO.)

But this is not the first time that Prada has flirted with an IPO. It nearly went public in 2001 but pulled back when demand for luxury products slipped following September 11.

One potential concern about an IPO at this time would be the soaring value of the euro and the decline of the dollar. Many European luxury companies are keeping their prices artificially low in order to keep dollar-spending customers coming through their doors, especially during the holidays. The deeper the discounts, the lower the margins, which may lead to analysts lowering the company's offering price.

And, of course, once public there is no guarantee that it would be a success. Remember DKNY? After going public in June 1996, management blunders battered the share price and in 2000 it sold itself to, who else, LVMH.