LVMH acquisition of Belmond a positive sign for the luxury industry, analyst says
today Jan 2, 2019
The 3.2 billion acquisition of Belmond group by French business LVMH has been seen by analysts as a positive signal for the luxury industry demonstrating the existence of new avenues for potential growth.
The business is a strong player in the hotel industry and owns Cipriani of Venice, the Splendido of Portofino and many other international luxury establishments, as well as luxury trains and tourist boats.
“LVMH is diversifying its equity portfolio by entering the hotel sector with a plan to diversify its earnings but still remain in the luxury industry. These are classic strategic operations that, on the one hand, are positive because they show that there are still attractive opportunities. However, on the other hand, in recent months the financial markets have seen significant decreases in revenue projections and an economic cycle that appears to be running out of steam,” said Vincenzo Longo, a financial analyst at IG Market. Longo also noted that these financial difficulties have “already reached the automobile sector while the luxury industry, while currently unscathed, will only feel the effects when it goes into recession.”
The group has increased in value with this transaction, “among other things, by paying a price slightly higher than the current market value, the deal has good prospects.” That is not all as the terms of the transaction are also strategic:
“When a business pays in cash to acquire another business it shows that it expects good returns and is very optimistic about the success of the operation,” said Longo.
However, this is not the case “when payments are made through stocks, shares, or exchange because, in this case, there is a distribution and sharing of risk from the moment when actions are granted to those who sell the business.” Longo also noted that, “in these cases we can see that the prospects are less promising and that there is a risk.” However, as LVMH paid in cash for Belmond, the business “has shown a real sign of optimism concerning the success of the operation which, for strategic purposes, adds to the group’s well-structured portfolio which focuses on the luxury segment of the market with prospects for increased revenue.”
This acquisition shows a rapid evolution “towards integrated solutions in a changing world. Interconnected services, for example large luxury hotels, can be used to showcase the business’ wider product portfolio.”
Longo’s sole doubt about this deal concerns the particular market. “That is to say whether or not the price has been judged correctly. However, this will only become clear on the stock market as, because the business made its own calculations, the market may be expecting a slowdown of the economy that does not reflect the business’ own projections and so we can only evaluate the deal in the short term.
According to the Italian analyst, there is still room for further consolidation operations in the sector but Italy will see more businesses being bought than seeing its businesses acquiring other companies.
“The Swiss and the French are the ones who are looking to go into this market. It is a sign that luxury hotels are a sector where fusions and acquisitions remain commonplace, good valuations have been made, the outlook remains strong, and companies are making important moves.” On the other hand, “Italy remains a place for acquisitions and a safe bet in the industry where it is good to take advantage of current purchasing.”
In Italy, Longo stated that there are no similar examples of Italian luxury groups making acquisitions in the sector. “For many years Italian luxury brands have been bought by mainly the French as well as the Swiss, The only acquisitions the country has managed to achieve recently are in the food and beverage sector, with both listed and private companies. With Campari in the United States, Autogrill, and Ferrero… this is the sector in which Italy is the strongest.”