By DUNCAN MAVIN
When Prada SpA goes to market, it's time to sell the luxury-goods sector short.
That's the tongue-in-cheek view of fashion-industry veterans who have seen the company's owners start the initial public offering process several times in the past decade, only to pull out when markets wobbled.
But when it comes to the Italian fashion house's latest plans for an IPO, in Hong Kong, Prada's owners could have the last laugh.
The word is that a listing could raise up to $2 billion for a 20% stake, valuing the company at around $10 billion. This would potentially help pay down Prada's debt while letting current shareholders—the company is 95% family-owned—partially cash out.
Timing looks good. Luxury-goods firms are fighting over rapidly growing Chinese demand for indulgences like leather handbags and expensive watches. China will become the largest market for luxury goods by 2020, accounting for 44% of global sales, up from 15% today, according to brokerage CLSA.
Tapping that opportunity requires investment. Luxury retailers such as Coach and Burberry PLC are expanding already into the Chinese hinterland, opening dozens of stores in second- and third-tier cities, and promoting fashion shows in major hubs such as Hong Kong, Shanghai and Beijing.
The merger market is heating up too. Last month, LVMH Moët Hennessy Louis Vuitton SA bought out Bulgari for $6 billion, while Hong Kong businessman Peter Woo bought an 8% stake in Ferragamo. LVMH has also raised its stake in Hermes to more than 20%. Meanwhile, bankers in Hong Kong are hawking other fashion brands and watchmakers as potential acquisition targets to clients, including private-equity firms and wealthy Asian buyers.
A Prada IPO should benefit from listing where the action is: Asia Pacific is Prada's largest region by sales. Hong Kong, meanwhile, is the world's hottest IPO market, and its investors understand China's appetite for luxury goods.
After a strong performance last year, luxury stocks took a dip in the first months of 2011 amid concerns about earthquake effects in the important Japan market. The country accounts for about 11% of Prada's sales. Against that, however, Chinese demand continues to surge.
Prada's earnings more than doubled last year to $352 million. Revenue jumped 63% in Asia Pacific, and 31% overall. At $2 billion for 20%, the implied price/earnings multiple of 28 times would be at the top end of luxury-sector valuations.
Even if Prada grew earnings by, say, 50% this year, that would imply a 2011 multiple of 19 times, roughly in-line with rivals such as Burberry or Tod's SpA. But IPOs should factor in a discount to already-listed peers. If Prada does sell for top dollar, investors really might want to ask if luxury stocks are nearing a cyclical peak.
Write to Duncan Mavin at email@example.com