A few remarks regarding the takeout of TOD’S by Catterton



On 12/2/2024, Catterton, a private equity company controlled by LVMH announced the takeout from the stock market of TOD’S with a 18% premium on 9/2/2024 closing price. After the takeout, shareholding structure will be as follow: Diego Della Valle will still own the majority with a 54% stake, LVMH will continue to hold a 10% stake and the remaining 36% will be in Catterton hands. A few remarks can be made on this operation.

1-The continuous de-rating of second tier luxury names on the stock market is attracting again private equity investors.

Behind the strong long-term trajectories of leading names like Hermes or LVMH, second tier names like TOD’S or Burberry have experienced a constant de-rating for the following reasons: Less organic growth, complicated network distribution allowing a bad management of stocks,  and frequent management changes to address the 2 previous issues have derated companies valuations which are now trading at huge discount versus Hermes or LVMH despite the fact of being perceived as takeover targets.

Catterton is paying 9 times EV/EBITDA for TOD’S versus 14 times for LVMH or 31 times for Hermes.

 2-Consolidation will not happen for second tier luxury brands

LVMH has been a minority shareholder in TOD’S for years and the depressed share price has not been perceived by Bernard Arnault as an industrial opportunity. After Gucci successful IPO in 1995, many luxury companies like Prada became public with the idea that a range of take overs following Gucci take out by Pinault in 2001 will boost listed luxury companies’ valuations.

23 years later, despite a 10% stake in TOD’S, it is not LVMH which is taking over the company but its financial arm (Catterton) which will manage the repositioning and the potential relisting of the company.

The only area of interest for consolidation is in the hard luxury segment (jewelry and watches) where all the important M&A deals occurred (Bulgari, Tiffany) over the past 15 years. There are regular rumors on Richemont *(hard luxury) but no rumors on Burberry or Prada (soft luxury).

3-Contrasting views between Private equity and public listed investors on the luxury good cycle.

Over the past 16 months, listed luxury goods names have experienced a huge derating in the prospect of a US recession and end of growth in China. Between the 14/7/2023 and the 20/1/2024, LVMH stock considered as the industry benchmark has lost 26.2% of its market cap. 

Obviously Catterton does not share this bearish view otherwise it would have not bought TOD’S this week. Historic data indicates that luxury spending is far more resilient than what public investors anticipate except during the 2008 crisis. As Hermes CEO recently quoted in last week results “luxury good is all about emergence of a worldwide middle class”

4-It is easier to fix companies problems away from public markets

Listed consumer companies which went through rationalization and restructuring experienced huge share price swings like Hugo Boss which lost 70% of its market cap in 2020 before gradually recovering. Public listed investors are very much focused on earning visibility and delivering of the next quarter results and tend to overreact positively or negatively to the news flow.

On the other hand, private equity companies do not experience scrutiny of the market, do not have quarterly deadline and can implement dramatic strategic and management changes without suffering erratic share prices movements .When Catterton paid 4 billion for Birkenstock in 2021, it had no deadline to make all distribution changes, product repositioning and management changes before listing the company when the “equity story” was straight forward to understand in 2023.

Conclusion

There are many examples in the consumer sector of private companies which successfully joined the stock market and enjoyed good share performance: Montcler, Birkenstock watches of Switzerland.

Maybe TOD’S taken out at 1.7 times revenues this week will be relisted in 3 years like Birkenstock at 5.5 times …. revenues.

*Richemont is owned by the Deshima certificate Croissance Contrariante.