Burberry is being wooed for its chequered past and bright future

Bernard Arnault, founder and CEO of Louis Vuitton Moet Hennessy (LVMH), is keen on a deal, it reported. It’s easy to see what’s in it for Arnault, after LVMH agreed to invest in Moncler. A deal would take a competitor out of the market and stop LVMH’s archrival Kering , the natural owner of Burberry, from getting its hands on it. 

As for Moncler’s chief Remo Ruffini, he has a lot on his plate. Then again, if he wants to build a new Italian house of luxury, he may not get a better opportunity than adding Burberry to Moncler’s stable.

Burberry’s iconic product, the trench coat, would benefit from Moncler’s expertise in outerwear but also diversify its suitor away from padded jackets, which tend to sell best at colder times of the year. 

The trench, and variations, including capes, jackets and dresses, could generate sales in warmer temperatures too. Burberry has also expanded its leather-goods ranges. Although this strategy has had mixed results, they would add further diversification for Ruffini.

While Burberry’s products stepped up under former CEO Jonathan Akeroyd and designer Daniel Lee, who remains creative director, the brand never seemed to achieve the same buzz as Kering’s Gucci in the early days of its turnaround under former creative director Alessandro Michele or which Prada’s Miu Miu is enjoying right now. 

Moncler, which works with a roster of outside designers and hosts events in different locations around the world to spotlight its products, may be able to bring more excitement to Burberry. There would be cost savings, too, as well as the greater clout with designers and landlords that come with scale.

There are some significant drawbacks for Moncler, although these might play into Arnault’s hands.

Even though Burberry shares have halved over the past year, it would still be a substantial bite for Moncler, which has a market value of about €13.4 billion. Burberry currently has a market capitalization of about £3 billion, after gaining around 40% since early September. 

Given the decline over the past year, investors might still demand a 50% premium, valuing Burberry at £4.5 billion. Burberry has little net debt excluding store leases.

Consequently, Moncler would have to fund a deal all or partly with shares. But there may be a complication here. Some UK-based fund managers can only hold British stocks. Moncler would have to price the offer at a level that compensates them for the fact that it’s offering overseas equity. 

So Arnault could step in to finance all or part of the acquisition in return for a bigger stake in Ruffini’s family investment vehicle and therefore a larger indirect holding in Moncler. Alternatively, Moncler could partner with L Catterton, the private equity firm backed by LVMH.

Meanwhile, Burberry has been trying to turn around its fortunes for the past eight years. The latest to attempt a revival is new CEO Josh Schulman, who will reveal his strategic blueprint next week after being appointed in July.

Whether Burberry continues to try to become a true luxury brand or moves down market, the company requires a lot of hard work. Arnault already has his hands full with the reinvention of Tiffany, rejuvenating smaller houses Givenchy and Fendi and battling a slowdown at Dior.

Little wonder then that it might make sense for him to have Moncler do the heavy lifting on Burberry. But Ruffini, too, is grappling with integrating Stone Island, acquired four years ago, which isn’t firing on all cylinders yet. It’s also not clear whether Moncler would get Burberry’s Britishness, emphasized by Akeroyd. 

It has captured Stone Island’s football casual heritage with advertisements featuring Oasis lead singer Liam Gallagher, so there are hopes it will recognize Burberry’s cultural relevance here. But the period when Burberry had an Italian CEO and creative director wasn’t a fruitful one.

Either way, Arnault has little to lose. If Moncler agrees to a deal and it goes well, he gets the upside from LVMH’s indirect shareholding. If Moncler bites off more than it can chew, he could swoop in for the whole of the company—small change for the luxury giant. Ruffini may need to be persuaded.

But Ruffini shouldn’t deliberate for too long. With Tapestry seen as a possible buyer of Burberry if it walks away from Capri Holdings Ltd, which now looks increasingly likely, there may be a limited window in which to strike. ©bloomberg