Introduction:
LVMH-backed L-Catterton and the LVMH controlling shareholder Financière Agache agree to acquire German footwear group Birkenstock for €4bn. The deal marks LVMH’s strong start to 2021 right after the closing of the Tiffany & Co. acquisition on the 7th of January.
Companies’ overview:
LVMH
Moët Hennessy Louis Vuitton known as LVMH is a French luxury group comprising 75 “Houses” 1) creating high-end products. The company was formed in 1987 through the merger of fashion house Louis Vuitton (founded in 1854) with Moët Hennessy, a liquor house established in 1971 through the merger of champagne producer Moët & Chandon and cognac distiller Hennessy.
It covers all five major sectors of the luxury market with companies in Wines & Spirits, Fashion & Leather Goods, Perfumes & Cosmetics, Watches & Jewellery and Selective Retailing. Some of the major luxury brands such as Ruinart, Christian Dior, Guerlain or the recently acquired Tiffany&Co. allow the group to have a global presence, with 41% of revenues generated in Asia (of which 7% in Japan), 24% in the US and 24% in Europe (of which 8% in France).
LVMH currently employs 163,000 people across its over 5,000 stores worldwide and has reported sales of 44.7 billion euros in 2020.
Fashion & Leather Goods is by far the biggest sector for LVMH, generating 47% of the group’s revenues. Indeed, despite the current health emergency, it only reported a 3% decrease in organic revenues in the first half of 2020, followed by a rebound, characterized by a double-digit increase during the following six months.
LVMH often features in the top news because of its numerous acquisitions such as its latest – Birkenstock.
Birkenstock
Founded in 1774 by Johann Adam Birkenstock and headquartered in Neustadt, Germany, Birkenstock Orthopädie GmbH & Co. KG is a German footwear company known for its clunky, comfortable orthopaedic sandals of the same name. The company’s original purpose was to create shoes that support the shape of the foot, compared to the flat-soled shoes of that time. Its modern-day shoes are notable for their contoured cork soles made with suede and jute, which conform to the shape of the wearers’ feet.
In 1966, the brand was introduced in the US by Margot Fraser, a German dressmaker living in California, with shoes initially being sold in health food shops. Over the next few decades, they became popular among those who rebelled against laced-up, conventional footwear. By the early 1990s, Birkenstocks became popular in the fashion world, eventually becoming a global brand.
With 8 distinct locations in Germany and a presence in 90 countries, Birkenstock is the largest footwear brand in Germany as well as a top five global footwear brand. The company is also the largest employer in the German footwear industry, with one in four employees in the industry working at Birkenstock. The company has a total of 4300 employees globally, with 2400 of them in Germany itself.
Industry Overview:
A pure necessity, footwear has grown globally to be a multi-billion-dollar industry. The products range from dress shoes, luxury and athletic footwear, sneakers as well as related goods. Leathers, textiles, and a variety of synthetic materials are the most common supplies used in production. Despite truly needing only a few pairs, the average consumers evolved to use more and more shoes for different purposes leading to a very fragmented market. For some, footwear has become a way to express their personality or status. Consequently, firms have adapted their marketing strategies and product selection tailoring to the current culture and attitudes. Moreover, influential celebrity endorsements have become a trend within the industry to drive market growth. Another driving factor is innovation and design improvements, but the growth is checked by rising labor costs and fluctuating raw material prices.
Prior to Covid-19, the industry was worth approximately $365.5 bn in early 2020 and was estimated to reach $530.3 bn by the end of 2027 with a CAGR of 5.5% from 2020 to 2027. In 2019, the United States was the largest footwear market in terms of revenues with a value of $91.2 bn, while in second place was China with revenues of $64.77bn. However, China was the production leader with 13.3 billion pairs of shoes. In general, Asia accounted for the consumption of 54% of the global footwear industry. The deep market is dominated by large firms such as Nike, Adidas, VF Corp, and others.
Like apparel, the footwear industry has been negatively affected by the COVID-19 pandemic, resulting in a slowed performance of the market. Firstly, one of the main effects is a significant reduction in retail sales since people are staying inside and spending less, while physical stores are closed. Another issue arose in the supply chain sector as they were obliged to halt operations due to the pandemic, and to make matters worse, retailers cancelled their orders resulting in stockpile merchandise that manufacturers could not sell. Not every sector of the footwear industry was negatively affected; leisurewear and e-commerce of footwear are set to benefit given the long hours spent at home. COVID has altered the development of the industry, but footwear is here to stay. To prepare for the reopening of the world, footwear brands are working towards a more digitalized competitive landscape and sustainable outsourcing of manufacturing.
Deal Rationale:
The deal enables LVMH to access new customers, but most importantly to intercept existing customers’ changing preferences. Birkenstock’s consumer base is expanding steadily, including an ever-growing share of the high-end clientele. This is due to the influence played by the recent collaborations of Birkenstock with high-end brands like Valentino and a rise in the demand for functional quality products in the luxury segment, especially among younger generations. As a result, casual wear and sportswear companies are being increasingly targeted by large fashion groups pursuing external growth strategies (see Moncler – Stone Island deal).
Birkenstock will benefit from synergies deriving from shared retail strategies, consumer insights and economies of scale with the LVMH brand portfolio. The partnership will pave the way towards Birkenstock’s growth in Asian Markets, where LVMH has already secured a strong market share, and sustains the brand’s presence in Europe and America. The new shareholders will also finance investments to expand Birkenstock’s direct-to-consumer business and e-commerce platforms. The German brand will also benefit from increased visibility in the high-end market, creating opportunities to partner with luxury brands in higher-margin markets.
Eventually, the decision of the founders to continue staying in the company as minority shareholders confirms the cultural fit between the two long-heritage family businesses, which will ensure continuity of commitment towards major shared values and a swift post-deal integration process.
Deal Structure:
According to the agreement, the Birkenstock brothers will retain a stake in the company, whereas the majority stake will be owned by LVMH. The involvement of the new partners came after the formation of the Birkenstock Group later in 2012, when the Birkenstock family decided to welcome the first non-family CEOs, Oliver Reichert and Markus Bensberg. Under their leadership, the company registered double-digit sales growth every year and a turnover of 722 million euros in FY 2019.
The popularity of the brand, together with the surge in sales it has recently experienced, made Birkenstock an alluring investment not only for LVMH but also for private equity group CVC, who also made a competing bid. According to insiders, CVC had offered an even higher price, but the decisive factor in winning the bid was that Arnault’s group knew the fashion industry and most of all access to the Asian market. The final decision was taken with the advice of Goldman Sachs.
Even though the financial terms of the deal were not disclosed in the announcement, due to confidentiality agreements, Reuters reported an estimated valuation of Birkenstock at the time of the deal of around €4 billion, including debt. According to the German newspaper The Spiegel, the two brothers will sell from 60% to 70% of the equity stake. The approval of the supervisory authorities is still pending.
LVMH’s investors are reacting positively to the deal. As shown below, the stock price only had a small flop on the day of the announcement, February 26th, but was able to recover fast, reaching an unprecedented peak of 753,50€ during the last days of March.
1) Brands
References: Refinitiv, MergerMarket, Reuters, FT, The Spiegel, Birkenstock website, LVMH website, CapitalIQ, Statista, Euromonitor, Bloomberg and FactSet
To contact the authors:
Giulia Zanetello
Ronak Bhatt
Mingzhao Li
Benedetta Magni
Beatrice Sciarra
Andrew Yerokhin
Bocconi Students M&A Circle 
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