LONDON  - Versace, designer of the safety-pin dress that made British actress Liz Hurley famous, is giving Blackstone a flashy exit. But new owner Michael Kors has its work cut out to justify the shopping trip.

The acquisitive U.S. company will pay 2 billion euros for the Italian brand from current owners the Versace family and the private equity group run by Steve Schwarzman, which acquired a 20 percent stake in 2014. The move makes strategic sense: U.S. luxury companies are on the hunt for high-end brands to rival European conglomerates like LVMH and Kering. Chief Executive John Idol spent $1.2 billion on stiletto-heel maker Jimmy Choo last year.

The financial logic is harder to justify. Versace’s accounts are not public, but Reuters reckons the group generated sales of 668 million euros last year, implying a three times sales multiple. That’s a modest premium to peer Burberry, which is worth 2.7 times trailing sales. Yet Burberry reported an EBITDA margin of 22 percent, whereas Versace’s 45 million euros of EBITDA, according to Reuters, suggests a paltry 7 percent margin.

A deal will likely take years to pay off. To justify a return on invested capital of say 7 percent, Idol would need to crank up Versace’s operating profit to around 176 million euros, according to Breakingviews estimates. Assume Versace can keep increasing sales by, say 10 percent annually until 2021, in line with recent growth rates. Then it would need an operating margin of around 18 percent to justify the price – a substantial improvement on current levels. The $920 million collapse in Michael Kors’ valuation suggests investors are not happy to wait.

Blackstone sashays away with the best deal. Schwarzman has doubled his initial 200 million euro investment in around four years, equivalent to an internal rate of return of over 15 percent. That’s not stellar by private equity standards, but still respectable for a minority investment, in a difficult sector like luxury. For Idol, explaining the new look Michael Kors to investors will be a harder sell.

CONTEXT NEWS

- U.S. luxury fashion group Michael Kors will buy Italy’s Versace, Reuters reported on Sept. 24. The purchase values the brand at 2 billion euros including debt.

- Private equity group Blackstone, which bought a 20 percent stake in the label in 2014, will exit the company. That transaction valued Versace at around 1 billion euros, including debt.

- Michael Kors wants to grow its portfolio of high-end brands and paid $1.2 billion for luxury shoemaker Jimmy Choo in 2017.

(Editing by Neil Unmack and Amanda Gomez)

© Reuters News 2018