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Quake Reverberations Felt in Luxury M&A

Last year, pent-up M&A needs in the luxury goods space that were withheld through the recession’s dark days finally saw the light of day, as big brand names like Tommy Hilfiger exchanged hands. But Japan’s earthquake and tsunami caused investors great consternation—and for good reason; Japanese luxury goods consumers are a driving force for the industry.

As Japan slowly rebuilds while facing an ongoing crisis, dealmakers, too, are ready to pick up the pieces. Already, prognosticators are declaring the Japanese economy is on its way back. For the most part, listed luxury goods companies’ shares like LVMH, Burberry and Hermes have rebounded substantially (if not completely) from last month’s bottoming out spurred by fears stemming from the Japan quake and financial and strategic bidders are expected to clamor again for deals.

“The luxury market is hot despite what happened in Japan,” Houlihan Lokey Managing Director Elsa Berry tells peHUB. “Strategics are looking toward globalization.”

It is financial sponsors, however, that could be left out in the cold as prized potential targets’ Ebitda multiples hit the 10x range. Thanks to booming economies in emerging markets—and perhaps also because traditional markets like Europe and the U.S. could lag behind in consumer luxury spending long-term as sovereign debt issues play out—large-cap strategics are making offers financial sponsors cannot match.

Perhaps PE buyers are eyeing opportunities in countries where affluence is spreading, and not receding. LVMH’s PE arm, L Capital, has reportedly been in extensive talks to buy a sizeable stake of Mumbai jeweler Gitanjali Group, and the investor is also reportedly in negotiations to buy into Genesis Colors, a retailer that had distribution rights in India for brands including Jimmy Choo and Canali. L Capital launched last year a $650 million fund to target deals in Asia.

It remains to be seen what private equity firms’ reaction will be to the new M&A environment. TowerBrook Capital Partners is expected to sell its stake in Jimmy Choo after more than doubling its revenue to about $230 million. And Permira and its co-investors in Hugo Boss and Valentino Fashion Group reportedly considered an outright takeover of the company (which they denied, natch) as their 2007 investment appeared to improve value over the last 12 months.

Going hostile, however, has a whole new meaning in the catty world of haute couture. Last year, LVMH began amassing a sizeable stake in Hermes; the company’s shares took a sizeable hit in the immediate wake of the Japan quake. Naturally, buyout rumors emerged, prompting Hermes CEO Patrick Thomas to make an egregiously poor choice of words as he sought to clarify his company’s desire to remain independent.