Multilaw lawyers from Macpherson Kelley, Kochhar & Co., Holland & Knight, Abreu Advogados, Penningtons Manches Cooper, and Lexincorp examine the impacts of web3 technology and a new generation of consumers on the global luxury sector's M&A deals
M&A activity among luxury brands continues to surge. In 2020 alone, 277 M&A deals closed within the global fashion and luxury goods industry, a five-year record. And from 1999 to 2014, groups of companies dedicated to luxury brands carried out acquisitions representing 71% of the value of M&A deals in developed markets, and 69% industry-wide.
But this prolonged activity among luxury brands is being driven by new engines. Fierce competition for market share, the digitisation of products, the emergence of the metaverse, and the enduring impacts of the pandemic each continue to heat up M&A deals.
This increased M&A activity is likely a result of the opportunities and disruptions across the market. Organisations are looking to create new customer bases, build greater digital and e-commerce channels and accommodate shifting customer demands.
Whatever the commercial and strategic drivers of a given deal, M&A lawyers must have sector-based expertise to deal with the specifics of these unique transactions.
This is particularly relevant considering the importance of brand loyalty, a growing focus on online sales in a post-pandemic world, and the increasing prevalence of crypto and the metaverse – factors not seen in most other types of corporate acquisition.
The importance of material adverse effect provisions in M&A
For example, Tiffany’s acquisition by the French luxury conglomerate LVMH highlights the importance of material adverse effect (MAE) provisions.
It is common for MAE provisions to exclude, or "carve out," multiple categories of events (such as natural disasters, geopolitical conditions and other force majeure events). Even if the value of the target company is diminished by this type of event, the buyer is obliged to conclude the deal. To escape a deal based on an MAE claim, the buyer must demonstrate that a target business is in disproportionate decline.
When LVMH sought to expand its jewellery stronghold through an acquisition of Tiffany in 2019, no one had contemplated a global pandemic. LVMH's sights were set on both short-term and long-term goals, hoping to repeat their success with the Italian luxury jeweller Bulgari, whom they acquired in 2011.
However, the pandemic had a profound effect on the luxury market, and Tiffany was no exception. Its share price fell 8.9 percent, while its June 2020 sales dropped by 44 percent for the quarter. Tiffany's merger agreement with LVMH allowed the buyer to terminate the deal between signing and closing in the event of an MAE.
The merger agreement did not specifically include pandemics as an MAE. Tiffany argued that the pandemic did not constitute one and that even if it did, the impact was not disproportionate. While LVMH and Tiffany eventually completed the deal in January 2021, the Delaware Court of Chancery issued a ruling shortly thereafter in Snow Phipps Group LLC v. KCAKE Acquisition, Inc., explicitly holding that a pandemic does not constitute an MAE unless the target had reduced sales of more than 50% for an extended period.
Delaware courts have been historically hostile toward MAE claims; the Tiffany acquisition highlights the importance of negotiating robust MAE clauses for buyers and carefully drafting carve outs to MAE clauses for sellers.
Legal factors to consider for luxury M&A
More broadly, corporate lawyers will be all too familiar with the key considerations for M&A transactions. But when it comes to a luxury brand target, comprehensive due diligence and vendor warranties are recommended to ensure that the acquirer knows exactly what they're buying, with particular care taken in the following areas.
- Intellectual property, brand protection and exploitation – In the luxury sector, most of a company’s value is in its brand; its IP is a core asset. A buyer will want to understand which IP rights are owned by the target and which are used under licence, and will be concerned with the risk of third-party infringement and counterfeiting. Another key issue is the intertwining of the family name in the brand, and ensuring that following a sale a founder cannot dilute the brand or confuse consumers by continuing to use the same name or a similar one.
- Real estate – While e-commerce and digital marketplaces have fuelled the expansion of the luxury segment, industry watchers have concluded that brick-and-mortar stores are still preferred by many customers. In this context, it is necessary to carefully assess the property title and leasehold rights of the target entity in an M&A deal. Many luxury brands will also have flagship stores and concessions in department stores that will need to be considered and investigated by prospective buyers.
- Employees and key person goodwill – An acquirer should consider where the value actually sits and incorporate terms in the purchase agreement accordingly. The value may lie with the founder, key designers or with the personal relationships end-client managers have developed. Acquirers may condition the deal so that key employment contracts or appropriate trade restraints must be put in place with those persons. Earn-outs based on future performance may also be desirable.
- Distribution lines – Larger fashion houses will have their own established distribution lines and manufacturing processes which, on an acquisition, a buyer will either leave behind or transport into an existing operating system. In the case of the former, whether distribution models can be terminated should be considered; in relation to the latter, a buyer should satisfy itself that such lines and processes are capable of being integrated.
- Privacy and cybersecurity – In an e-commerce-centric world, a buyer should investigate the privacy laws that apply to the target business and the transportability of customer information. An acquirer should ensure it understands the target’s systems, the range of data held and gathered, existing policies and procedures in place, and laws regulating the target. Luxury brands tend to hold personal details of affluent clients, making them attractive targets for cyberattacks.
- Inventory management – Due diligence for luxury brand M&A should also consider the proportion of carry over versus seasonal stock (the markdown risk) and what controls and inventory management arrangements are currently in place so as to maintain product value (such as through buybacks).
Luxury M&A: national perspectives
Australia: For foreign buyers, free trade principles and tight regulations await
In Australia, the Competition and Consumer Act 2010 (Cth) prohibits mergers that would substantially reduce market competition
Sellers may also face liability under the Corporations Act 2001 (Cth) or the Competition and Consumer Act 2010 (Cth) if they engage in conduct that misleads or deceives, or is likely to. For this reason, while there is no positive duty for a target to disclose information to a potential acquirer in Australia, a seller usually conducts its own due diligence review. There are provisions under the Corporations Act 2001 (Cth) that prohibit a person from acquiring ‘relevant interests’ in voting shares in listed public companies, and certain other larger or listed entities, unless an exception applies.
Australia’s foreign investment approval regime is set out in the Foreign Acquisitions and Takeovers Act 1975 and its accompanying regulations (FATA) and is administered by the Foreign Investment Review Board (FIRB). In connection with an acquisition of shares, assuming no special rules apply and it is not a national security or media business, a foreign person needs FIRB approval to acquire a 20% or more equity interest in an Australian entity where the target is valued above the threshold. The threshold for non-foreign government investors in non-land investments usually ranges from AUS $289 million to AUS $1,250 million.
India: An emerging luxury powerhouse
The pandemic has failed to halt India’s appetite for deal-making in the luxury sector. Activity has largely been led by Aditya Birla Fashion and Retail Ltd (ABFRL), a leading fashion retail company which is part of the conglomerate Aditya Birla Group (valued at USD $45 billion); and Reliance Brands Ltd (RBL) which is part of the Reliance Industries Limited (net worth USD $243 billion as of March 2022).
Recently, ABFRL announced an investment of INR 900 million to acquire a 51% stake in Masaba, a luxury brand with interests in apparel, beauty and personal care, and accessories. RBL has also entered into a distribution arrangement with Maison Valentino and a franchisee arrangement with global luxury brand Balenciaga, making RBL the sole partner to launch the brand in India.
There is also growing interest from global funds in the Indian luxury segment. L Catterton, backed by LVMH, has said it considers India as a high-priority market and expects to invest significantly. Notwithstanding major challenges for luxury brands around a growing counterfeit market, M&A activity in the Indian luxury segment is likely to grow significantly.
Portugal: The strengths and challenges of a strong Portuguese luxury market
So-called “reverse integrations”, where a company acquires a current or potential supplier, are common in Portugal. Large luxury fashion companies often absorb their suppliers, such as when Nextil, a Catalan textile company, acquired the Portuguese luxury clothing specialist Keupe, with the goal of increasing its production capacity.
Nextil had already acquired two other Portuguese companies – SICI93 Braga and Playvest – in 2018, allowing the company to increase its order backlog, which, in September 2021, was 250% greater than a year earlier, reaching €15 million of signed orders.
Portuguese luxury brands are populated with eponymous entities. A brand named after its founder tends to be harder to sell, and owners are typically reluctant to accept terms that risk their personal brand and creative control. And since a brand's fortunes often depend on its designer, investors must forge trusting relationships with them to guarantee success.
UK: Changing of the guard between upstart and heritage luxury retailers
The value of luxury brands with a strong online presence continues to grow. Global investment firm The Carlyle Group recently acquired a majority stake in luxury streetwear and sportswear retailer END for £750 million. END generates its main revenue from worldwide online sales and has relationships with designers such as Valentino, Givenchy and Alexander McQueen.
Meanwhile, Frasers Group, whose businesses include UK department store House of Fraser and clothing retailer Flannels, also acquired fashion retailer Psyche from its boss of 38 years for an undisclosed sum. Psyche is another luxury fashion boutique that houses more than 200 high-end fashion brands.
M&A enquiries relating to a brand’s employees should flush out details of anyone working in the business who is not employed and might therefore not be acquired by the buyer or conversely might transfer under TUPE. A buyer will want to ensure that a target brand’s design team stays intact, and key personnel are properly remunerated and incentivised.
In a family-run luxury brand, the parties will also need to consider how much involvement the founders will have post-sale, as understandably such sellers often find it difficult to let go of the stewardship of the brand. END’s founders retained a significant minority stake and remained as co-executives, and Mr Cochrane continued as Psyche’s CEO.
El Salvador: Tighter anti-money laundering laws and Bitcoin possibilities
In El Salvador, foreign luxury acquisitions must be reviewed by the Competition Superintendency, including when the acquisition takes place in a foreign country but the target has an entity in El Salvador, or is registered as a foreign entity. In addition, only proposed deals that surpass total assets of USD $219,000,000.00 or total income of USD $262,800,000.00 are subject to be reviewed by regulators.
Anti-money laundering compliance has recently become a particular focus of M&A compliance. Since anti-money laundering acts have been reinforced in El Salvador, any company that fails to comply will run into severe banking and negotiating challenges.
It's also important to remember that Bitcoin is legal tender in El Salvador. If two or more entities wish to close an M&A transaction in Bitcoin, they can proceed according to relevant national legislation.
The trends likely to shape future deals in the luxury sector
Looking forward, a number of key trends and drivers are expected for the luxury industry in 2022 and beyond, which are likely to influence M&A activity:
The promise and pitfalls of the metaverse
Global brands are building stronger online and digital footprints. For many, that means entering and evolving in the metaverse as they seek to engage with younger, digital-first consumers.
M&A activity among emerging and stronghold brands is closely tied to this shift. “The main focus of M&A at the moment is on brands exposed to the youngest generation,” says Paola Carboni, analyst at Italian bank Equita. In December, Nike acquired RTFKT, a leader in game engines, NFTs, blockchain authentication and AR, as it seeks metaverse expansion.
But debate continues to rage among IP lawyers about how to protect trademarks. Though digital tools such as the Aura Blockchain Consortium and AI-powered MarqVision are tackling counterfeits, illegal copies of luxury items still cost the industry a quarter of its total trade, $1.2 trillion.
Crypto: the coin of the e-commerce realm
Businesses are increasingly willing to accept cryptocurrency. According to a recent survey of retailers by Deloitte, nearly 75% plan to accept either cryptocurrency or stablecoin payments within two years. Still, 52% of retailers also plan on immediately converting cryptocurrency income to a more stable legal tender.
M&A activity is also spiking at the intersection between luxury retail and online platforms. Chinese multinational e-commerce company Alibaba and Switzerland-based luxury house Richemont revealed plans to each invest $300 million in Farfetch, and a further $250 million each in Farfetch China to "accelerate the digitisation of the global luxury industry."
How will luxury brands navigate accelerating consolidation?
Consolidation is expected to remain a significant feature of M&A in the luxury sector. The biggest fashion groups, such as Kering and LVMH, are continuing to swallow up other brands and suppliers, making it difficult for independent or family-owned businesses to compete.
Smaller companies are taking longer to recover from the pandemic and are struggling to adapt to e-commerce and online marketing. It remains to be seen whether these brands will succumb to the big players, or if new multi-brand conglomerates will emerge to rival existing groups.
Innovation and uncertainty will be focus of future M&A deals
Digitisation has turned the luxury goods market on its head. Consolidation has increased rapidly as a handful of major conglomerates jockey for primacy and strive for the attention of younger consumers with high disposable incomes. The present situation has opened the door to new, tech-savvy entrants, with whom luxury brands can collaborate to create unique digital experiences and services.
However, success in the luxury industry will continue to depend on core tenets of brand loyalty and building communities through experiences, whether in-person or online. As luxury conglomerates evolve and scale along these lines, M&A attorneys should be ready to consider the unique implications that these deals pose and the impact the new forces of digitisation might have on their size and complexity.
The authors are members of the global law firm network Multilaw and include:
Cláudia Santos Malaquias, Associated Partner, firstname.lastname@example.org, and Benedita Marques Pombo email@example.com, Trainee Lawyer, Abreu Advogados, Portugal
Raj Chakrabarti, Senior Resident Partner firstname.lastname@example.org, Shalini Saxena, Senior Associate (IPR team), Anushree Aditi, Senior Associate (Corporate team), Kochhar & Co, India
Danielle N. Garno, Partner, Danielle.Garno@hklaw.com, Julie Blackmore, Senior Counsel, Julie.Blackmore@hklaw.com and Gabrielle E. Engel, Associate Gabrielle.Engel@hklaw.com , Holland & Knight, USA
Adriana Portillo, Junior Partner, email@example.com, Lexincorp, Central America
Cathy Russo, Managing Principal Lawyer Cathy.Russo@mk.com.au, and Daniel Wignall, Principal Lawyer firstname.lastname@example.org, Macpherson Kelley, Australia;
Matthew Martin, Global Head of Corporate and Co-head of Fashion and Luxury Brands Matthew.Martin@penningtonslaw.com and Emily MacDonald, Associate – Corporate, Fashion and Luxury Brands, Emily.MacDonald@penningtonslaw.com, Penningtons Manches Cooper, UK
 M&A in the luxury goods sector - statistics & facts | Statista
 Press Release, LVMH, LVMH Reaches Agreement with Tiffany & Co. (Nov. 25, 2019).
 U.S. Securities and Exchange Commission Schedule 14a – Tiffany & Co.
 Snow Phipps Grp., LLC v. KCAKE Acquisition, Inc., No. 2020-0282-KSJM, 2021 Del. Ch. LEXIS 84, 66–70 (Ch. Apr. 30, 2021).
 Vogue Business, Why 2021 Will Be a Bumper Year for M&A, Jan. 1, 2021
 Press Release, Nike, Nike Acquires RTFKT, Dec. 13, 2021
 Vogue Business, Why 2021 Will Be a Bumper Year for M&A, Jan. 1, 2021