With Hong Kong on holiday, Italian fashion icon Prada chose to kick off the institutional roadshow for its Hong Kong IPO in Singapore on Monday. The Milan-based company seeks to raise between HK$15.5 billion and HK$26.3 billion ($2 billion to $2.6 billion) and has set a price range that at a top end values it at a premium to its key comparables.
Perhaps to prove that it is worth that bit of extra, Prada last night treated Hong Kong-based investors to a proper fashion show, complete with glamorous models and snapping cameras, and attended by both Miuccia Prada and her husband Patrizio Bertelli.
This isn’t the first time that a fashion designer has decided to show samples of their work to investors ahead of an IPO, but last night’s show was a rare opportunity for people outside the fashion industry to see one of the world’s top luxury brands work its magic.
Invitations to the event were a hot commodity and while the bookrunners had accommodated the seemingly huge interest in the listing by holding the PowerPoint part of the evening at the Grand Hyatt ballroom to fit in 450 investors, only about 300 of them were also invited to attend the fashion show — giving it an instant air of exclusivity.
The investors didn’t get a sneak peak to what Prada thinks we should be wearing next winter, however — that is due to be revealed at a show in Venice on June 19 — as the designs featured were those intended for the current summer season that were shown on European runways earlier this year. But since most of last night’s crowd would have missed those, that is unlikely to have mattered much.
According to people who attended, the show ran for only 10 to 15 minutes, but showed off numerous dresses, coats and, of course, handbags that ranged from extremely beautiful to somewhat quirky. One person noted that the entire show was accompanied by one piece of music, which “sounded like it was Swedish”. Being Swedish myself, I was naturally intrigued and after a bit of digging around the internet I found that Prada’s summer collection this year was accompanied by a song from the radio musical The Seduction of Ingmar Bergman by US pop/rock group Sparks. The song in question is called “Garbo Sings” and cleverly helps to complete the picture of what I now realise (after more digging on the internet) is a collection inspired by the 1930s — the era when Greta Garbo was as much a style icon as she was a movie star. Whether most of the investors present did actually get that is another question.
What they do seem to have got, however, is the fact that this IPO will be hot. According to sources, the deal was covered before London opened on Monday — even though Hong Kong investors were off to celebrate what is commonly known as Dragon Boat Day and even though the company had chosen not to sign up any cornerstone investors before launch.
As for most consumer products companies listing in Hong Kong, retail investors are expected to play an important role on this deal, driven by Hong Kong’s fascination with international luxury brands and the fact that this is the first such brand to go public here. Because of an automatic clawback mechanism that increases the size of the retail tranche when there is strong demand from retail investors, the number of shares available for institutional investors actually gets reduced on popular deals. This can result in a scarcity effect and force up valuations as investors scramble to get a piece of the deal. To limit this effect, Prada has sought and received a waiver to cap the size of the retail tranche at 25%, as opposed to the usual 50%.
The retail tranche will start out at 10%, but will be increased to 25% if it is more than 100 times covered. And given that many retail investors are supposedly asking their brokers to get their Prada shares in paper format as opposed to electronically so that they can frame them and put them on the wall, that does seem a likely outcome.
However, as Prada published a pre-listing information document on the Hong Kong stock exchange website last Friday it emerged that investors buying the IPO might have to pay Italian capital gains tax if they make a profit when selling the shares. Sources say that according to current rules, that appears to be the case right now, although there is a possibility that it could change. One source also suggested yesterday that the tax might not be applicable to small investors, but added that investors who are worried about the issue should seek tax advice. Whether this will put a dent in the demand for the shares remains to be seen.
Prada is offering 423.3 million shares, or 16.5% of its enlarged share capital, at a price between HK$36.50 and HK$48. Only 14% of the shares are new, meaning the company will raise no more than $365 million from the listing. However, that should go quite a long way towards its plan to open 80 self-operated stores this year to add to the 319 stores it had at the end of last year. According to the information document, 25 of the new stores will be in Asia-Pacific. It is also aiming to expand into the Middle East and other rapidly growing markets where it currently doesn’t have a presence, including Brazil and Russia. Prada also sells its designs through 1,400 wholesalers and 33 franchise stores, which gives it a retail presence in more 70 countries.
The price range values the company at 21 to 28 times its projected earnings in the fiscal year to January 2012, according to the joint bookrunner consensus. At the low end this is in line with a number of other luxury goods designers like LVMH Moet Hennessy Louis Vuitton, which trades at a 2011 P/E multiple of 19.3 times, Tod’s (21.7 times), Tiffany (20.7 times) and Burberry (22.5 times for the fiscal year to March 2012). Hermes is a stand-out at about 40 times, and hence is not considered a key comp.
French cosmetics and skin care products brand L’Occitane, which a year ago became the first non-Asian consumer products company to list in Hong Kong, is also trading around the same levels, at 21 times its projected earnings for the fiscal year to March 2012.
The final price will be determined after the close of New York trading on June 16 and the trading debut – under stock code 1913 to mimic the year the Prada brand was created – is scheduled for June 24. CLSA and Goldman Sachs are joint bookrunners together with Italian banks Intesa Sanpaolo and Uni Credit.
Aside from its Prada brand, which account for 79% of sales, the company also operates the Miu Miu brand, which caters to younger customers, and the two shoe brands Church’s and Car Shoe.
In the latest fiscal year, the company derived 32% of its revenues from Asia-Pacific, compared to 41.8% from Italy and the rest of Europe combined. However, this portion is growing rapidly as sales in Asia-Pacific have grown at a compound annual growth rate of 51% in the past two years, compared to less than 2% in Europe and 1% in Italy. The shift towards Asian consumers also helped the company to stay profitable throughout the latest financial crisis.
In the six months to July 31 this year, Prada expects to generate at least €150.7 million of net profit. This would put it on track to exceed last year’s full-year profit of €250.8 million, which was up 150% from the previous 12 months.
However, Prada is still battling with a large amount of debt, which is a legacy of its aggressive acquisitions in the 1990s. Most of those acquisitions, including its non-controlling stakes in Gucci and Fendi, have since been divested in an attempt to turn its finances around, but at the end of January, it still had about €300 million of long-term debt as well as €660 million of short-term liabilities, including bank overdrafts and short-term borrowings.
An attempt to raise equity through a stock market listing 10 years ago was toppled by the 9-11 terrorist attacks and irrespective of its huge success as a fashion brand, three other tries to go public in Milan since then have also failed. The decision to come to Hong Kong and tap an investor base that to some extent overlaps with its most enthusiastic customer base should allow it to break that negative trend.