It is common knowledge by now that luxury goods company Prada is eyeing a listing on the Hong Kong Stock Exchange. In April, the Italian luxury brand filed a prospectus stating that it plans to enter the Hong Kong stock market in June. The high-profile initial public offering (IPO) from Prada has already piqued interest among luxury market watchers. With other luxury brands also mulling the possibilities of a Hong Kong listing, how the Prada IPO story plays out will be significant.
The recovering market is acting as a spur, convincing many brands to enter into IPOs while the going is good. Like Prada, many Italian companies are biting the bait. Several are smaller, family-owned companies with annual sales of between $100 million and $300 million, which are looking to give new direction to the business. IPOs are a great boon for companies with expansion plans, particularly in the luxury sector, for this is expensive business. Not everyone has a wealthy backer like French luxury conglomerate LVMH or private equity group Permira Advisers.
All Eyes On Asia
The future for luxury goods is now in Asia. China has already supplanted Japan as the second-largest luxury market. It should not be long before the country shoots up to oust the United States from the top spot. A recent report by Asia-focused research company CLSA predicted as much when it stated that China is expected to grow from 9 billion euros in 2010 to 74 billion euros ($107 billion) within the next ten years, thus becoming the largest luxury market in the world. The CLSA report added that affluent Chinese spend on luxury handbags, watches, apparel and jewelry. Another report, this time by US-based consulting firm Bain & Co., said that the Greater China region – that is, the area covered by the mainland, Hong Kong, Macau and Taiwan – is poised to become the world’s largest luxury market this year itself.
A survey by real estate consultance CB Richard Ellis also found that four Asian cities – Hong Kong, Singapore, Tokyo and Beijing – are among the top ten destination cities for luxury retailers worldwide.
Ben Kwong, the chief operating officer at Hong Kong stockbroker KGI Asia, said that luxury brands will have to create a local presence if they hope “to capitalize on the high growth in China”. He added that a listing on the Hong Kong Stock Exchange would help make brands more prominent.
Hong Kong’s IPO Boom
The emerging nations of Asia are creating an economic shift away from traditional centers like New York, London and Milan. Last year, Hong Kong emerged as the world’s largest IPO market after raising US$57.7 billion through 87 listings. New York managed only $39.1 billion from 99 listings. Already this year, 25 IPOs in Hong Kong have raised $7.7 billion.
Asians now account for 50 percent of luxury sales worldwide, and luxury brands are looking to tap into this growing market. Sam Kendall, who heads UBS’ equity capital markets for the Asia-Pacific region, reportedly said, “Companies want to face their future, not their past.” But to achieve this, luxury brands – most of whom are based in Europe and America – will have to build a local presence. Currently, foreign companies are not allowed to list on the Shanghai stock exchange. So Hong Kong becomes the gateway to the growing Chinese market, particularly since Chinese investors from the mainland have little difficulty in moving funds to Hong Kong. Moreover, these investors prefer investing closer home.
The lack of scrutiny in Hong Kong, unlike in European and American IPOs, is an added bonus for firms like Prada, which are not known for maintaining transparent financial accounts.
Being listed in Hong Kong has yet another advantage. Investment banks here are free to make deals with big investors prior to the IPO going public. These investors are required to hold onto their shares for six months following the purchase, which in turn boosts public interest in the brand.
The only downside is that local investors in foreign firms find themselves cut off from the action in Europe and the US.
Luxury Brands In IPO Mode
Luxury brands do not always gain from IPOs. In 1996, DKNY failed to create IPO magic unlike Polo Ralph Lauren in 1997 and Burberry in 2002. Finding a wealthy buyer is important, or else luxury brands could just as easily go bust as Christian Lacroix did in 2009. As it is, luxury brands have to walk the tightrope between maintaining exclusivity and building brand presence. Populating the area with stores in the manner of mass manufacturers can only spell doom for a luxury business.
However, optimism is in the air even as Prada prepares to list in Hong Kong through a $2 billion IPO. If the Prada IPO proves a success, the firm would become the first Italian and only the second West European brand to list in Hong Kong. The brand is currently estimated to be valued at $16 billion. Last year, skin care company L’Occitane became the first French brand to list in Hong Kong. It managed to raise HK$5.5 billion ($708 million) through an IPO.
Firms like Salvatore Ferragamo SPA, Jimmy Choo and Moncler will be following the Prada story carefully, for they too are considering going in for IPOs, though not necessarily in the Asian sector.
The family-owned Ferragamo is expected to list up to 25 percent of shares on the Milan stock exchange in June this year. Prior to the high-profile buyout by Labelaux, even the owners of luxury footwear brand Jimmy Choo were mulling an IPO in Hong Kong. As for Moncler, 48 percent of which is held by US-based private equity firm Carlyle, Marco Se Benedetti, Carlyle’s European co-head revealed that Moncler could list on the Milan stock exchange before summer. The company hopes to raise 500 million euros ($700 million) through this listing.
A recent report said that American leather goods firm Coach is eyeing a dual listing in Hong Kong. Coach could be joined by American luggage-maker Samsonite as well. Meanwhile, Hong Kong jewelry retailer Chow Tai Fook is preparing for an IPO even as second-hand bag retailer Milan Station soars to new heights following a recent IPO. With optimism in the air, more and more luxury brands are hopping on to the IPO bandwagon to raise funds. Watch out for more high-profile IPOs in the coming months.
Bottom line: “If observed closely, an IPO can sometimes be a prelude to a deal.”