IPO and Dollarization

BERTELLI'S BOLD MOVEPrada's Long-Awaited IPO Planned for Hong Kong

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By LUISA ZARGANI

With contributions from Amanda Kaiser and Nina Jones

MILAN

— Prada SpA is trying yet again.

The Italian luxury goods house said Thursday that it will go ahead with an initial public offering on the Hong Kong Stock Exchange, although it did not specify a time frame or the size of the stake to be sold. Analysts believe an IPO could happen as early as this spring and value the company up to $9.5 billion.

It will be at least the fourth time the firm has aimed for an IPO, having called off the last several attempts due to weak global markets.

“Our strategy of expansion worldwide, carried out with a strict cost-control policy, led to a significant growth in revenues and profitability and further reinforced our position as one of the leaders in the luxury goods market,” stated Patrizio Bertelli, chief executive officer of Prada. “Strengthened by these results and confident in the future development of the group, we can now face the coming challenges with serenity and seize the best opportunities offered by the international capital markets.”

Banca IMI-Intesa Sanpaolo Group, UniCredit, CLSA-Crédit Agricole Group and Goldman Sachs will act as joint global coordinators and joint book runners. Bonelli Erede Pappalardo, Slaughter & May and Davis Polk & Wardwell will be the firm's legal advisers.

The pool of banks is no surprise given that Intesa owns 5 percent of the company, with Miuccia Prada and Bertelli controlling the majority 95 percent stake through Amsterdam-based Prada Holding B.V. Davide Mereghetti, a top manager of important corporate clients for UniCredit, last year joined the Prada board, succeeding Brian Blake, formerly chief operating officer.

Intesa, UniCredit and Crédit Agricole were among the banks that granted Prada a $455 million loan last July to be used to refinance a long-standing debt and to fuel the company's retail growth. The loan was due to be repaid by 2012. Prada reduced its debt to 429 million euros, or $566.2 million, at the end of October, compared with 485 million euros, or $693.5 million, at the end of January 2010.

At the time, extension sources speculated it set a deadline for Prada to seek an IPO, depending on market conditions.

For months, a listing in Hong Kong was rumored to be Prada's top choice. Given China's enormous potential for business, an IPO in the historic gateway to the country may be regarded as the next logical step for luxury goods brands. Prada has been capitalizing on growing revenues in the Asia-Pacific region, which showed a 51 percent surge in sales in the first nine months of 2010.

In particular, China and related territories are the areas that are developing at the quickest pace for the company. Prada said 2010 revenues in China, Hong Kong and Macau rose 75 percent from 2009, to 389 million euros, or $532.3 million at current exchange. That represents nearly 20 percent of the group's total turnover.

Earlier this month, Bertelli told WWD the group plans to open a significant number of stores in Asia over the next three years and expects to attain significant growth in the region. Prada currently has 14 stores in Mainland China, nine in Hong Kong and two in Macau, and this year plans to open nine stores in Mainland cities such as Harbin, Guangzhou, Changchun and Hangzhou. Another 11 stores are expected to open in 2012.

Prada has been focusing on developing its global retail network, with the aim of generating more than 70 percent of consolidated turnover from directly operated stores next year. The company had 310 stores at the end of October.

The Italian firm staged a major fashion-show event in Beijing earlier this month, and Miuccia Prada traveled there for the occasion. Also in January, the company said it was going to open design studios in Beijing and Paris. “Chinese customers are very attentive to fashion trends, to which they attribute great relevance, and they are also competent in terms of quality and design,” said Bertelli. “It is thus a qualified market, not only in terms of commercial development but also in the interpretation of trends.”

A Milan-based luxury goods analyst, who requested anonymity, said Hong Kong “is the natural alternative to Prada's own country,” and attributed the firm's choice mainly to a financial issue — i.e., price. “Asian markets are thirsty for luxury goods, and Prada could be valued up to 30 percent more, at about 7 billion euros [$9.5 billion] in Hong Kong, compared to about 5 billion euros [$6.8 billion] in Milan,” said the analyst.

He also said the IPO could take place as early as this spring, with Prada floating between 15 to 20 percent of the company. Downplaying any friction with the banks involved, which were said to be vying for a listing in Milan, he said: “It's a win-win situation: Debts will be repaid, the banks will enjoy their IPO fees and everyone will be happy.”

Kate Calvert, a retail analyst at Seymour Pierce research in London, concurred, saying Prada “is more likely to get a higher multiple by listing in Hong Kong. And the luxury market is a growth market. It's got to be Asia [where Prada plans for its future growth to come from] — China is the second-largest luxury goods market in the world. The wealth of emerging markets is a natural growth opportunity for any luxury brand.”

A study last year by Bain & Co. estimated the luxury market in Mainland China had grown 30 percent to $12.8 billion, and the region is expected to become the third-largest luxury market in five years. Greater China, including Hong Kong, already ranks number three, showing 23 percent growth in 2010.

Luca Solca, a senior research analyst at Sanford C. Bernstein, also believes Prada “is attracted by the higher multiples they can achieve in Hong Kong, in the same vein to what L'Occitane has just done [the French beauty group listed its shares on the Hong Kong Stock Exchange last year]. Prada is one of the most prominent leather goods megabrands — I think it could grow substantially. As with many other brands, Asia and China are very important. But Prada has global appeal, with the ability to grow all over the world. I believe the IPO should allow them to have more funds to this end.”

The company, whose 2010 fiscal year closes on Jan. 31, expects sales to reach more than 2 billion euros, or $2.6 billion at an average exchange rate, up 30 percent compared with 2009, said Bertelli. Earnings before interest, taxes, depreciation and amortization are expected to reach between 450 million and 500 million euros, or $594 million and $660 million.

The group controls the Prada label, which in the first nine months last year accounted for 78 percent of total sales, the Miu Miu brand, Car Shoe and Church's.

Prada first revealed an intention to do an IPO on the bourse in 2000 and has called off its IPO more than once — most notably after the Sept. 11, 2001, terrorist attacks and in May 2002, due to market volatility.

Miuccia Prada, though, in an interview with WWD last week, dismissed the idea the company had delayed an IPO more than once. “Everybody says [we postponed the IPO] five times. But this five times was invented by other people. We tried it once, but then [there was Sept. 11, 2001] and we didn't do it. Everything else was always said by other people.”

Over the past two years, overseas enterprise listings in Hong Kong have included L'Occitane, U.K.-based Prudential, giant Russian aluminum producer Rusal, Schramm from Germany and SouthGobi Resources from Canada. According to the Italian Trade Commission, there are no Italian companies currently listed in Hong Kong.

“Hong Kong is the most important financial base in that area, at the heart of a region where luxury brands grow at a double-digit rate on a yearly basis and will do so for over the next 30 years at least,” said Armando Branchini, deputy chairman of Milan-based consultancy InterCorporate. “There are more opportunities for success, and you can see how favorable the evaluation and the potential of high-end brands are there.”

A spokesman from the Hong Kong Stock Exchange said “the numbers suggest there have been more overseas companies listing in Hong Kong recently. We think that trend is due in part to our efforts in recent years to promote the benefits of listing in Hong Kong to potential new issuers overseas.” Over the past five years, representatives from the Hong Kong Exchange (HKEx) traveled throughout the Asia-Pacific region, the Middle East, Europe and North America to publicize it. Rising valuations and an above-average price-to-earnings ratio of stocks contribute to making HKEx “attractive” to European firms, said the spokesman.

“With zero capital flow restrictions, numerous tax advantages, currency convertibility and the free transferability of securities, Hong Kong offers an attractive market for both issuers and investors,” he concluded.

While companies on the Milan Bourse must submit financial results every quarter, Hong Kong-listed firms only have to issue figures for the half-year and full-year periods.

Mercury Advisers co-founder and luxury goods consultant Tomaso Galli said a Hong Kong IPO for an Italian firm “would be logical as a sign of its commitment to that market and is bound to catch the media's attention.” Galli, a former Gucci veteran who also worked at Prada, said that in the Eighties and Nineties, many companies listed on the New York Stock Exchange because “that was the market they wanted to conquer” and it was a step that would grant additional visibility. Yet Galli noted that it “normally makes sense to be listed in the country where your company is based, because there is more awareness and investors know you better, the press writes about you more and you can be more hands-on.”

Hong Kong is the most important financial base in that area, at the heart of a region where luxury brands grow at a double-digit rate on a yearly basis.

— ARMANDO BRANCHINI, INTERCORPORATE

A Milan-based luxury goods analyst said “companies would not have considered the Hong Kong exchange two or three years ago — it was all about New York, London, Paris and Amsterdam, but this is no longer an America-centric market. That started declining on Sept. 17, 2008 [when Lehman Brothers filed for bankruptcy] and the world that is growing is somewhere else.”

Francesco Trapani, ceo of Bulgari, which is listed on the Milan Stock Exchange, said he believes “that for a European company that operates in the luxury market and that is not listed yet, the first IPO should reasonably take place on a European bourse. This is mainly because Western investors interested in luxury, are for the moment more attentive and close to the sophisticated European markets rather than those of Hong Kong and Shanghai.”

That said, Trapani noted the issue is different for companies that are already listed in Europe. “In this case, in fact, a secondary listing in Asia would allow to raise further capitals from Chinese investors that have more familiarity with Asian listings and that often have difficulties in investing, for reasons connected to local regulations, in companies listed on other markets,” Trapani remarked.

Prada, spring 2011.

Patrizio Bertelli

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