Burberry buyer would need steel-plated trench coat

Heavy wear. As one of few global luxury groups without a controlling family shareholder, it’s little surprise that Britain’s 3-billion-pound ($3.9 billion) Burberry is perennially subject of takeover talk. A sliding share price and CEO change this year ds to M&A case. Would-be buyers, however, will require deep pockets and buckets of patience.

Shares in trench coat maker rose 5% on Monday after an independent luxury-news website reported that Italy’s Moncler was eyeing a bid, citing unnamed industry sources. purveyor of posh puffer jackets, which is backed by French behemoth LVMH, said it would t comment on “unsubstantiated rumours”. By Tuesday, Burberry shares h lost all previous day’s gains.

One problem for possible suitors like Moncler, LVMH, Coach owner Tapestry or Switzerland’s Richemont is target’s sliding operating profit, which implies a poor return on invested capital. Assume that any buyer paid a 30% equity premium. overall outlay, including debt, would be 5 billion pounds. In return, new owner would get Burberry’s forecast operating profit of 262 million pounds after three years, using Visible Alpha consensus data.

If buyer could also slash a quarter of UK group’s sales and distribution costs, which is standard for industry M&A according to one analyst, cost savings would be 282 million pounds. ded to operating profit, and taxed at 28%, overall reward would be 391 million pounds in financial year ending in March 2028, implying an 8% return. industry’s weighted aver cost of capital is more like 9.5%, Barclays analysts reckon.

Those calculations assume that new CEO Joshua Schulman can live up to analysts’ expectations, which is hardly a given since brokers have continually h to slash ir forecasts over past year. former Michael Kors and Coach executive faces Herculean task of turning around a once aspirational brand that is w increasingly associated with kckdown prices. company has two sorts of stores: around 400 flagship sites selling products like 2,000-pound trench coats at full value, and over 50 outlets that tritionally hawk older designs at a discount. latter , which appeal to mass market and account for 30% of sales according to HSBC estimates, bring in extra revenue but arguably dilute brand’s exclusivity over time.

Any new owner may refore have to invest in marketing and new designs to regain some cachet. That’s risky and time consuming, especially in a sector downturn. Based on analysts’ current operating profit forecasts, using Visible Alpha data, return on investment would only surpass Burberry’s 9.5% cost of capital in 2030, assuming same 282 million pounds of M&A cost savings. In or words, re’s an argument to be me for buying Burberry, but payback would take a long time.

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Fashion website Miss Tweed reported on v. 3 that Italy’s Moncler was considering a bid for Burberry, citing unnamed sources. Moncler, kwn for its puffer jackets, said it would t comment on “unsubstantiated rumours” of a possible deal between two luxury brands. Burberry told Reuters it does t comment on speculation. Burberry shares closed 4.8% higher on v. 4, but slipped back subsequently. As of 0849 GMT on v. 6, y tred 2.7% above v. 1 closing level.