LONDON – For those looking for signs that luxury’s top three conglomerates, Kering, LVMH, and Richemont, are paying attention to modern luxury companies, LVMH’s pursuit of cult cycling outfitter, Rapha, offers legitimate confirmation.
News of the potential deal broke in London on Thanksgiving weekend, just as most in the US were still working off their Turkey-induced food comas. As a prominent player at the center of the decade-long boom in cycling’s mainstream popularity, reactions within the cycling community to Rapha’s possible sale were mixed. While some shrugged, effectively arguing that this was just a natural progression for a company driven so strongly by branding, Rapha loyalists frowned, worried that the company they’ve grown to love might lose the soul that first won them over.
For an enthusiast brand with a genuine sense of purpose — and a highly devoted following — this level of divided opinion is to be expected. And it’s part of the reason why LVMH, through L Catterton, its recently-formed investment arm in which it owns a 40 percent stake, is so eager to add Rapha to the LVMH stable. Luxury and sportswear are proving to be a potent mix at the moment. The wellness movement, as The Fashion Law’s Julie Zerbo accurately pointed out, shows no signs of slowing, and each new premium performance, activewear or sporty leisure upstart that arrives each year is further proof. LVMH, for its part, has taken notice, and is looking for opportunities to participate in a space that, while not exactly new, is certainly surging — both in growth, and in new ideas.
Hoping to present you with more insight on the deal from those directly (or tangentially) familiar with the talks, we reached out to both Rapha and L Catterton. But we were unable to get answers from them on the record. So we spoke to Douglas Hand, arguably the top fashion lawyer in the US, and founding partner of the law firm Hand Baldachin & Amburgey, who helped triangulate the specifics of the potential purchase for us.
How much is Rapha likely to sell for?
Rapha only made a profit of £1.1 million ($1.4 million) on £48.8 million ($62.1 million) revenues in 2016. Those, frankly, are slim margins, especially for a mature luxury operator that’s been in business since 2004. Still, it’s sold online, has select wholesale accounts, and also sells through 14 global Rapha Cycling Club locations. This makes it anything but an e-commerce-only company, and every bit a fully-developed brand with healthy, robust sales channels both online and off. In fact, that it also has its own retail locations (and thus retail funnels) makes its model more of a self-contained system.
Investors and buyers seem to be weighing profits and positive cash flow now more than revenues; but even so, will LVMH be more concerned with revenues here over profits? The answer is yes, says Mr. Hand, who expects “revenues to be a compelling marker” for LVMH. More to the point: “For a solid brand in the right market segment — like Rapha (a high-end luxury fitness brand) — and given the low profitability, this could be a deal where we see somewhat of an outlier in terms of EBITDA multiple,” he predicts. “Even on a 1x revenue valuation, which Rapha should certainly get barring any skeletons in their closet of which I’m unaware, this could be a transaction well above the more typical 10x-20x EBITDA multiples we are used to seeing for healthy luxury brands.”
For context, Dollar Shave Club’s $1 billion buyout by Unilever in July was likely in the 20x-30x EBITDA multiples range. (Though without knowing Rapha’s exact margins, it’s hard to pinpoint an accurate valuation based on EBITDA multiples.)
What will LVMH do with Rapha once acquired?
If we reflect back on LVMH’s long track record of acquisitions stretching back to the early 1980s, the pattern is an easy one to observe: buy a dormant luxury name or a promising niche luxury property on the upswing, go mass market, charge as much as possible, align with a celebrity or two to raise the “profile” of the brand, and sit back as the billions (or hundreds of millions) pour in. LVMH has, in other words, not exactly shown a light touch, and it hasn’t shown a propensity to simply let things be as they are.
But Rapha is a niche company that’s based on a technical, performance-driven platform, and it boasts a core customer base that is super sensitive to smoke-and-mirrors plays. So does LVMH tread lightly or will they just stay the usual course here?
For Rapha loyalists, the outlook is slightly disconcerting. “LVMH’s goal should be to expand Rapha’s niche appeal into a broader more comprehensive — and I hate to use the term here, but I must — lifestyle brand,” Mr. Hand says. “Cycling is a growing segment and has some very logical fashion extensions that LVMH is well positioned to capitalize upon.”
In the event that LVMH via L Catterton does end up purchasing Rapha, a brand with a rabid, outspoken, and savvy core community, it may, however, have to tread lightly. It might be best to support Rapha when and where help is needed, and expand its reach slightly, but otherwise, it would be wise to not meddle or change too much.
Rapha has gotten this far by doing what’s worked best for their specific model, and while the potential for more growth is certainly there, it would be a huge risk to change the tenor of the brand just to adapt it to LVMH’s tactics.
How does this reflect LVMH’s investment strategy going forward?
The Rapha talks are particularly notable given that LVMH has generally shied away from (or completely ignored) serious investment in or acquisitions of modern luxury companies. It’s traditionally been active in reviving older luxury houses, blue blood names, or, if younger, designer fashion talents.
Rapha, at only 13 years old, heading in 2017, is a mere baby in the grand scheme of things. Not only this, but given that the brand is anything but a pure fashion play, it also shows that LVMH may be coming around to understanding the powerful value (and the new standards) of modern luxury operators.
So this is certainly a change in tack for LVMH, given their track record. But how does this change in attitude reflect the conglomerate’s investment strategy going forward? Are modern luxury brands now more firmly on their radar?
They are certainly aware of what’s going on in the activewear market, Mr. Hand suggests, especially when it comes to the men’s market, which is starting to boom apart from the women’s market (the activewear market has been largely driven by the women’s side). Niche appeal for brands with a good story to tell, a strong provenance, and that are focused primarily on the male activewear consumer will continue to be strong pulls for LVMH. “Most athletic gear and apparel is almost, by definition, mass,” Mr. Hand says. “To put a luxury proposition out there with a true European legacy, which Rapha (and cycling) has, is just good business.”
As Lean Luxe readers know well, sports, leisure, and luxury sit at the center of the modern luxury space. Which means that as LVMH and others start to pay attention to the market, things could get interesting heading into 2017 and beyond. There could be more modern luxury mergers and acquisitions — and investments — on the way.
More news on this as it develops.
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