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After the Buying Binge, Luxury Groups Forced to Deal With Debt

With the era of empire building over, it’s time for the empire builders to pay down the mounds of debt they ran up during their rampant expansions.

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And the world’s biggest luxury goods company is still paying top dollar for some of its acquisitions. In the first quarter of the year, LVMH paid $219.1 million for an additional 17.2 percent stake in Fendi, a fashion house it already controlled. All in all, LVMH has paid a presumed $1.11 billion for 84.1 percent of Fendi, a company that is posting losses on an estimated annual sales volume of $305.6 million. (Although it is important to remember that LVMH struck its initial deal to buy Fendi in tandem with Prada at the apex of the luxury goods M&A boom in 1999.) Fendi has said it will break even next year.

Selling off noncore assets like champagne house Pommery helped LVMH reduce its net debt by $2.08 billion over the course of 2002, thus cutting its interest expenses to $339 million from $529.3 million the year before.

Similarly undaunted on the spending front is Fin.part. Despite a debt pile approaching the size of its $528.1 million in 2002 sales, its Cerruti unit earlier this month opened the doors on a plush flagship on Rodeo Drive and stores in Paris and Moscow are planned to open later this year. Shortly before stepping down as chairman amid the KPMG-induced crisis, Gianluigi Facchini said Fin.part would succeed with efforts to recapitalize and sell off real estate and manufacturing assets.

Yet others aren’t sure that strategy will be enough. “There are indebted companies where there is a core cash-generator, like Prada, and there are companies where there isn’t a core cash-generator, like Fin.part,” noted one fashion insider.

The situation is even tougher for the smaller privately held companies that dominate much of Europe’s fashion landscape. Andrea Ciccoli, vice president of Bain & Co. in Milan, said these emerging players are “all under a lot of pressure.” With the prospects for initial public offerings high and dry and few investors willing to finance emerging brands, the small fries are best off remaining niche players with lean retail networks and low cost structures, he said.

“I think there will be a structural change in the way to conduct business,” he said. “Those with the cash are king. Those who didn’t already spend a lot will have better growth possibilities.”
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