There is speculation that Patek Philippe might be for sale.
If this is indeed true – there is only one group that could and should buy Patek Philippe. It is LVMH.
Bloomberg reported earlier this week that Patek could be for sale according to industry sources. While I was initially surprised by this report, there could be some merit to it. According to several sources, internal family issues at Patek’s controlling family could led to an eventual sale of the company.
There are many luxury groups that of course would be interested in Patek. Because let’s face it – it has the strongest brand name in watches (besides Rolex). All the big luxury players know that this is a once in a lifetime opportunity for a luxury group to own the king of high-end Swiss watch making, that has been privately held for over 180 years.
I can list many companies that could potentially afford to buy Patek and where it could make sense. The obvious ones that come to mind are: Richemont group, Kering and LVMH. I also think Hermes and Chanel could be interested and would have the financial strength to at least take a sizeable financial stake in Patek.
But out of all names mentioned, LVMH by far would be best placed to buy Patek. Let me explain why.
LVMH is a diversified luxury brands group, run and owned by Bernard Arnault (main picture).
Arnault has built up the group by carefully buying companies with strong brands. Sometimes they were out of favour and he could buy them rather inexpensively (his initial stake in Dior in 1984 and Sephora 1997) and sometimes he just saw more potential in them (Louis Vuitton, Rimowa, Bulgari, Dom Perignon). As a result LVMH today is the biggest player in the world of luxury owning some 70 of the most desirable brands on this planet that include Louis Vuitton, Dior, Bulgari, Loro Piana, Dom Perignon, Krug and Hennessy.
As strong as LVMH is as a group, there is one division where they don’t own a dominant position: watches and jewelry. And this is the reason why Patek would be so interesting for LVMH. In one swoop they would turn their watches and jewelry division into a powerhouse that would match their strength in all other divisions. It is not that their watch division is weak. Far from it. But their watch brands currently with Hublot, Tag Heuer, Zenith and Bulgari don’t match LVMH’s strength in other divisions where they own the leading brands of the world. The problem has been that for a long time the great brands in watches, especially on the high end, are owned by Richmont (Cartier, Vacheron, Lange and Jaeger Le Coultre). LVMH does not own a watch brand at the very top of the luxury pyramid (think Breguet, Lange, Audemars or Vacheron Constantin). Buying Patek would solve this problem for LVMH and also not interfere with their existing brands which are at much lower price points and have a different end customer.
Buying Patek would address LVMH problems on so many other fronts as well.
Not only would Patek elevate the watch division of LVMH to another level (in terms of positioning on the higher end of the luxury scale) but it would also make it a more important division. Right now watches and Jewelry only account for €3.8bn or 8% of their expected €46bn total sales for 2018. As great as some of the brands are that LVMH owns – they are not an important player in watches right now. Not relative to other groups like Richemont and Swatch but also not relative to their own total sales. Adding another estimated €1.3 -1.5bn in sales, which Patek would bring to the table, would slowly make LVMH a more relevant player. Not only in terms of sales, but more importantly in terms of brand strength.
The ‘silver fox’ has been waiting for this.
Arnault is known to be a very opportunistic buyer (hence my nickname silver fox) who can wait for years before making his move. In one of the bloodiest battles in fashion history he almost succeeded in taking over Gucci before he lost his case in court. In 2014 he took advantage of the weak share price of Hermes and took a large stake in the group with 23%. It was only thanks to the tight voting control of the Hermes family that he didn’t succeed in eventually buying the company. Even though he was forced to sell the stake in the end – he made billions for himself and his shareholders in the process.
Just recently he secured another trophy asset, The Belmond Group which owns unique luxury properties that includes the Cipriani Hotel in Venice, the Copacabana in Rio, 21 club restaurant in NY and the Orient Express and Pullman trains among other brands. While he paid a strong price for the group at $2.4bn (he paid 4.5x sales and 18x EBITDA) – it was a typical Arnault style acquisition: Unique high quality properties that will not come to the market again anytime soon.
Patek in my view is a similar asset (in that it is uniquely positioned) and has many attributes that Arnault normally looks for.
Exceptional brand strength, superb heritage, strong DNA and quality and lastly a continuous history and leading market share or dominant position in its niche. What Arnault will also like is that since Patek is family run, they can take long term decisions and not care about quarterly numbers or the short term (even if LVMH group is a publicly listed company). Lastly, he likes brands, where when he takes them over, he can continue to grow them. In that sense Patek is also a nice fit. Even though they make more than 50’000 watches a year – there is plenty of room to grow (an estimated 20m people in the world could potentially afford to buy a high-end watch according to the CEO of Audemars Piguet).
LVMH could easily afford to buy Patek.
According to my estimate Patek is worth anywhere between CHF 10 – 20bn (with a min bid at 7x sales). Even on the high end of this estimate, LVMH has the financial strength. They will do an estimated €46bn in sales in 2018 and have EBITDA of €12bn. They also have €8bn of cash on their balance sheet. They do 3x more EBITDA and have 3x more sales than their closest rivals Kering and Richemont group. Furthermore, they have a stable and strong credit rating of A+. Although LVMH bought Dior for over €13bn in 2017 their debt / equity ratio at 22% allows for leverage of their balance sheet.
I don’t see other groups digesting Patek as easily.
It would be a stretch for Hermes (EBITDA 2.5-3bn in 2018 estimate) although they have almost no debt, but it would be too big a fish for the conservative Hermes family to approve. Swatch group couldn’t afford it in my view especially on the higher end of the valuation of more than 10x sales. Richmont potentially could (EBITDA 4.3bn) but I don’t see the fit for the group – Vacheron and Lange compete in the same segment. The other interesting player could be Chanel who are investing heavily into watches (acquired recent stake in FP Journe and own Bell and Ross and entering JV with Tudor movements). They are large (have an estimated USD 10bn in sales) and better than 25% operating margins (my guess as they are a privately held group) but I don’t see the strategic fit here either other than both are controlled by private families that have a long-term vision for the brand.
I don’t know if Patek is for sale or not. What I do know is the following:
The family that controls and own Patek (the Sterns) will choose very carefully who they want to sell to if they sell out at all. If the company is indeed for sale, they will not simply choose the highest bidder. They will want to choose a partner who will ensure their brand will last for generations to come. They spent three generations building up the brand – they will not want a partner who is short term oriented (that is why I rule out a private equity deal).
In that sense I think the Sterns could sell a stake in the company rather than sell it outright, and I see no better partner than LVMH. Arnault has a track record of buying brands and keeping them in tact respecting the heritage but growing them carefully with a long-term vision. Not only does LVMH have the financial strength to do this deal, it would also solve a problem within LVMH right now: To become more important in hard luxury meaning watches and jewelry.
If indeed Patek is for sale it would not surprise me if LVMH is the winning bidder. It would be typical of the silver fox. Buy a trophy brand that has a dominant niche and allow it to grow further. And it would fit perfectly in the portfolio of LVMH which owns some of the most desirable brands on this planet. Right now LVMH is a leader in all the segments it operates in. Except in jewelry and watches.
Buying Patek entirely, or a large stake, would fix this problem and be the perfect birthday present for Arnault who is turning 70 in a few weeks time.
(Main credit picture: Zagaleta.com)
NB: Some people have suggested other buyers like a private equity fund. I rule that out as Patek doesn’t really fit that model and the Sterns would not succumb to that short term profit mentality. Other suggestions have included Apple (don’t see the strategic fit) and Rolex (I think they are doing fine by themselves and have more momentum than Patek right now).
