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22 Oct 2020 By Lisa Jucca

High-end shoemaker Salvatore Ferragamo is in for a change of skin. Members of the family that controls the struggling 2 billion euros Florentine shoemaker have explored a stake sale, Reuters reported on Oct. 21. Following the lead of high-end brands Valentino and Versace and bringing in private equity would make sense. But the sprawling Ferragamo family must agree to take a step back.

Ferragamo, favoured by Hollywood stars like Audrey Hepburn, was struggling even before Covid-19 struck. In years preceding the pandemic, its sales stayed flattish at around 1.4 billion euros even as the broad luxury goods market boomed. A 60% year-on-year revenue plunge in the second quarter of 2020 was one of the deepest across the industry. Chairman Ferruccio Ferragamo “categorically” denied on Wednesday any sales plan, but growing fears of a protracted crisis have probably made some family members nervous.

At 2.6 times its expected sales, Ferragamo looks cheap compared to bigger Italian rivals such as Moncler and Prada. But it’s too small a bite for luxury behemoths such as Bernard Arnault’s LVMH or Gucci-owner Kering. Tapping private equity funds to help with a relaunch seems more logical. Valentino, in which Permira secured control in 2007, and Versace, which sold a 20% stake to Blackstone in 2014, did this with some success. The funds restructured the brands before selling them on, with Blackstone doubling the group’s value in a sale to Michael Kors.

Revamping Ferragamo would not be cheap nor easy. A 30% premium would value the Italian group over 3 billion euros, including debt. Assuming 30% of that is debt-financed, the buyer could muster an internal rate of return around 14% if it managed to grow Ferragamo’s sales annually by at least 3% over the next five years and hike its EBITDA margin to 25% of revenue, according to Breakingviews calculations. But that’s twice the bombed-out margin expected this year.

Given family opposition, an outright sale at this stage is difficult to imagine anyway. An intermediate step could involve selling a minority stake, either at the company or holding level, to a buyout fund to secure fresh cash. But private equity would drive a hard bargain on the price. And for both buyer and seller, it only really makes sense if the newcomer is allowed to crack the whip.


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