Tod's has reached an agreement in principle to acquire the rights to the Roger Vivier brand from the Della Valle family, which is the main shareholder of the Tod's group. Until, now Tod's had a license agreement with the family, which owned the brand indirectly.
The transaction has been unanimously approved by the independent directors on the board of Tod's. Its completion is contingent on approval by a majority of the minority shareholders. However, they will have to represent at least 10 percent of the share capital at an extraordinary shareholders' meeting, due to be held on Jan. 13 or 18, to validate a rejection of the deal.
Several financial analysts have questioned the fairness of the deal, under which Tod's would pay €415 million for the ownership of the Roger Vivier brand. The sum excludes value-added tax, which is refundable. Tod's is buying the trademark from Gousson, a company that is owned by Diego Della Valle and his brother Andrea. They bought the brand name in 2001, three years after the death of the famous eponymous French shoe designer, who is regarded as a creative genius and credited for pioneering the stiletto heel.
If the transaction is approved by Tod's shareholders, Gousson plans to reinvest half of the proceeds from the brand's disposal by subscribing to a reserved capital increase for Tod's at a price of €83.53 per share. Following the capital increase, Gousson would hold 7.51 percent of Tod's' capital, while the shares of all other shareholders would be diluted by 7.51 percent. But since the Della Valle family controls Tod's as well as Gousson, its aggregate direct and indirect stake in Tod's would rise to 60.66 percent from 57.47 percent.
The remaining €207.5 million would be financed by using the group's cash and drawing on a credit line of about €400 million carrying annual interest of less than 2 percent. During a conference call, Emilio Macellari, chief financial officer of Tod's, said that the group is expected to have more than €100 million in cash at the end of the year, but less than the €130 million booked at the end of 2013.
The decision to launch the capital increase for Gousson is meant to prove the Della Valles' confidence in the company's potential and to avoid an excessive debt burden for Tod's, Macellari indicated, adding that the transaction would not affect its “generous” dividend policy. Tod's paid a dividend of €2.00 per share on its 2014 results, representing the distribution of 63 percent of its net income. Observers noted that the Della Valle family would be even more than before the main beneficiary of such a policy.
As part of the deal, a unit of Tod's, Roger Vivier France, would pay €20 million for Roger Vivier Paris, a company that runs the flagship store located at 29, rue du Faubourg Saint-Honoré, in Paris. Roger Vivier Paris has a positive cash position of €2.5 million, effectively reducing the purchase price to €17.5 million. The store is currently consolidated as a wholesale client, but the purchase would turn it into a directly-operated store (DOS) that is expected to generate sales of €8-10 million this year.
Another related transaction is a settlement of €20 million that would be paid by Gousson to Tod's as compensation for missed opportunities due to the fact that Roger Vivier's sales strategy was conditioned by Gousson's request to limit distribution to maintain the brand's exclusivity.
The complex arrangement has raised some eyebrows. Exane BNP Paribas has gone on record to define the deal as being “very expensive,” adding that the Della Valle family is raising its stake in Tod's with a “depressed valuation.” According to the daily La Repubblica, financial analysts were generally expecting a valuation of €200-250 million for the Roger Vivier brand, with Citigroup going as far as €300 million. During the conference call, John Guy of MainFirst Bank expressed a feeling that Tod's' minority shareholders are not benefiting from the value accretion the group has achieved with the development of the Roger Vivier brand.
Macellari responded by saying that the deal's price tag is “exactly within the range” of certain analysts' estimates. Taking into account the interest rate paid for the credit line and additional dividends paid with the issuance of new shares, the additional cost for Tod's would be lower than the royalties paid for Roger Vivier, he added.
He noted that Roger Vivier's sales rose at an annual average rate of 51 percent during the 2011-2014 period and that they should continue to enjoy double digit-growth in the coming years, further lifting the cost of royalties in the absence of a change of ownership. Macellari said that there are several ways to calculate the value of a deal but “no matter” the criteria used, analysts will find a price in line with the one established for the transaction.
According to Tod's, it was necessary for the group to secure the ownership of the brand because, even though Roger Vivier has the same shareholders as Tod's, it is not certain that the company will be allowed to retain the license eternally. Macellari also claimed that the Della Valles would have preferred waiting longer before selling Roger Vivier but were prompted to do so because “the market was asking for it.” Waiting longer to buy Roger Vivier would only have meant paying a higher price for the brand, he pointed out.
Should minority shareholders reject the deal, Tod's will enter into talks to renew the license agreement with Gousson. Macellari said that the focus had been on buying the trademark so no real discussion have commenced to renegotiate the license. Tod's has only been paying royalties of 7-8 percent on its wholesale revenues from the brand, but not on its retail sales. Under the current deal, no royalties will be due from Jan. 1, 2016.
Roger Vivier has been growing strongly under the management of Tod's, which has held the license since the brand was acquired by the Della Valles in 2001. At the end of the first five-year period of the license, in 2005, the brand had annual sales of €4 million. The second licensing period ran until 2010, when the brand's sales reached nearly €22 million. The current license agreement ends this year, and in the first nine months of 2015 alone, Roger Vivier generated sales of €112.1 million, up by 20.1 percent year-on-year.
Roger Vivier also generates higher gross operating margins Ebitda than the entire Tod's group. The management would not disclose the exact profitability of the label, but pointed out that the group had a 20 percent Ebitda margin in 2014. Licensing income of 7-8 percent of sales should be added, indicating a possible Ebitda margin of 28 to 30 percent for Roger Vivier.
Tod's plans to continue managing Roger Vivier as an exclusive brand, limiting its store openings to three to five per year. Roger Vivier generates about half of its sales from Chinese customers buying at home or abroad. The brand does not want to overstretch its exposure to Greater China, so any further developments would focus more on the U.S. and Europe, the management said. Roger Vivier had 31 DOS and four franchised stores at the end of September.
Reiterating his confidence that the company will achieve mid-single-digit growth in its sales next year, generating a higher Ebitda margin than the level of 19.7 percent forecast for 2015, Macellari added that the purchase of Roger Vivier will further improve the chances of meeting these market expectations.