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News, Lenses, Frames, Business

Essilor-Luxottica deal gets thumbs up from analysts

03/03/2017
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Following the January 16 announcement that Essilor and Luxottica would merge under a €45 billion (AU$64 b) deal, market analysts have focussed on the likely outcomes and the ramifications for the international optical industry.

Despite lingering question marks over some aspects of the deal, the overriding sentiment is that Europe’s two largest optical multinationals are a perfect fit and the proposed merger will avoid a future costly battle for market supremacy.

According to a number of industry experts, the move means both companies are better placed to take advantage of the burgeoning global market and, just as importantly, side step what could have been a profit draining scenario.

Late last year managing director and head of luxury research at French investment firm Exane BNP Paribas, Luca Solca, had anticipated the margins for each company were likely to shrink as a result of increased price competition in both frames and lenses.

However, now the two will join forces, most industry analysts predict the new company – Essilor-Luxottica – is well poised to take advantage of a growing industry that is already worth US$121 billion.

This is partly because while both companies serve customers with vision impairments, there is limited direct overlap in their operations.

(L - R) Hubert Sagnières, Essilor CEO and chairman and Vincent Del Vecchio, Luxottica chairman
(L - R) Hubert Sagnières, Essilor CEO and chairman and Vincent Del Vecchio, Luxottica chairman

Additionally, Euromonitor analyst Jasmine Seng said the merger would see the business control more than 50% of the sunglasses market and also become the largest maker of spectacle frames, lenses and ready-made reading glasses.

Seng’s Euromonitor colleague, Ms Ayako Homma, noted the shifting eye wear landscape meant businesses were diversifying their portfolios and the industry was no longer characterised by a distinct set of players who operated within their own sphere of influence.

“With rising competition from low-priced rivals and the challenges of online distribution, even leading players, such as Essilor and Luxottica, have been spurred to extend their fortunes across categories,” she said.

“Essilor entered the spectacle frames and sunglasses categories, and Luxottica Group SpA has grown its retail operations through acquisitions made in order to sell spectacles as well as contact lenses.

“The merger will support both companies and clearly consolidate their market presence.”

Homma went on to detail the impact the merger would have on the new company’s retail network, particularly its online presence, which she said had become a high priority for eye wear companies.

Data from Euromonitor International’s research shows internet sales had increased by 79% in current value terms over the past five years and according to Homma, the increasing number of worldwide digital consumers showed no signs of slowing down.

Luxottica acquired glasses.com from WellPoint Inc. in 2014, while Essilor picked up online retailer coastal.com from Coastal Contacts Inc., and also owns FramesDirect.com and EyeBuyDirect.com.

“Luxottica and Essilor have pursued an acquisition and partnership strategy to accelerate their online sales growth,” Homma said.

“The merger will allow these companies to further expand their business in online retailing and enhance online accessibility.”

According to Francesco Bertazzo from finance website, themarketmogul.com, the deal may also be a response to the change in strategy from French luxury groups Kering and LVMH, after it was reported the latter was interested in purchasing a stake in Italian company Marcolin Group.

Should such a purchase proceed, it could allow LVMH to follow Kering’s example and create a new company to fully internalise its business.

Bertazzo argues such a strategy would be in keeping with a wider trend that has seen luxury brands vertically integrate their suppliers as a way of gaining more control over their own products and brand image.

“Given the possible future threat represented by luxury brands taking control of their business, the Luxottica-Essilor deal might be seen as a defensive move aimed at protecting Luxottica’s current unquestioned leadership in the market,” he said.

Combined with more than 140,000 staff and a presence in every corner of the globe, the new entity will be primed to capitalise on emerging markets in Asia, Africa and Latin America, where more than 2.3 billion people currently need optical frames.

US market research and consulting firm, Grand View Research, has forecast that the global eyewear market will reach US$184 billion (AU$243 b) by 2024.

“The increase in an ageing population and growing acceptance of eyewear, backed by rising disposable incomes of people worldwide, are expected to play an important role in market growth,” a Grand View report read.

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“Moreover, growing awareness regarding proper eye health among the consumers is projected to strengthen the growth prospects over the forecast period.”

However, while many market analysts have applauded the deal, some have flagged potential difficulties.

Underlying questions

Mr George Bradt wrote in Forbes that, while on the surface, the deal appeared to make perfect sense; he still had underlying questions about how well it would work in practice.

“There’s a fundamental cultural disconnect that risks haunting the merger for years to come. The more leadership focuses merging cultures early on, the more successful they are going to be over time,” he said.

“The key to that is going to be changing attitudes from thinking about function versus design to thinking about function and design as complementary strengths,” Bradt added.

Mr Cedric Rossi, an analyst at Bryan Garnier & Co, was also quoted in Bloomberg as saying the merger might face antitrust issues and that management appointments in ‘newcos’ were quite complicated.

Management on both sides of the merger have dismissed concerns about anti trust issues on the basis that there was little overlap between the two company’s product ranges and the merger only represented about 15% of the world’s market.

However, with the dual CEO structure and equal numbers of board members from both sides, it may be difficult for management to agree on difficult decisions should the merger hit troubled waters.

Terms of merger

The transaction entails a strategic combination of Essilor and Luxottica businesses, consisting of Delfin contributing its 62% stake in Luxottica to Essilor in return for newly issued shares to be approved by Essilor shareholders.

Essilor would then make a mandatory public exchange offer to acquire the remaining and outstanding shares of Luxottica, and subsequently become a holding company.

Following the transaction, Delfin would own 31%–38% of the new entity’s shares and would be its largest shareholder. The voting rights of any shareholder of EssilorLuxottica would be capped at 31%.

According to The Economist, the deal would offer 81-year-old Italian billionaire founder Vincent Del Vecchio a way out of the business even if he was not stepping down, something he has long resisted.

“Through his family trust, Delfin, he will be the largest shareholder in the merged entity (potentially with 38% of it) and its ‘executive chairman and chief executive’ for the next few years,” The Economist article read.

“But Essilor’s boss, Hubert Sagnières, who is 61 and will share equal managerial duties of the new entity, looks well placed to take charge once Del Vecchio retires.”

Australian impact

The proposed merger is still a long way from being approved and no changes in the local operation of Essilor or Luxottica are expected, as each company will continue to operate independently.

Having said that, over the past 10-15 years the two companies have been involved in a number of mergers and acquisitions in the Australian market and already work closely together.

For example, the Sydney-based Eyebiz Laboratories is a joint venture between Essilor and Luxottica.

Eyebiz Laboratories also supplies Luxottica with lenses for its OPSM and Laubman & Pank stores.

In a major strategic move in 2003, Luxottica took a controlling interest in OPSM, which, at the time, operated 461 stores in Australia and 35 in New Zealand under the names OPSM, Laubman & Pank and Budget.

However, in 2012 Luxottica closed more than 100 stores across its brands.

A more recent study, published by Insight in June 2016 reported Luxottica’s total Australian store count as 590. It included 328 OPSM and 47 Laubman & Pank practices and 157 Sunglass Hut stores.

Essilor, meanwhile, has focused on non-retail acquisitions over the same period.

In 2009, Essilor acquired four Australian optical businesses. Equity interests were taken in three prescription laboratories, Prescription Glass, Precision Optics and Wallace Everett Lens Technology, and a 50% stake was acquired in Sunix Computer Consultants, a developer of practice management systems.

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