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What Lies Beneath Luxottica and Essilor’s €50bn Merger

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In January 2017, Luxottica Group, the world’s largest eyewear company, and the leading ophthalmic lens manufacturer Essilor announced a €50bn deal that will lead to the creation of a group with combined revenues of more than €15bn, 140,000 employees and sales in over 150 different markets. This is the second-largest cross-border M&A deal in Europe’s history and is expected to have a huge impact on the dynamics of the fast-growing eyewear industry.

The Eyewear Industry

Luxottica is the leader of the eyewear industry with a 14% market share. The Italian company owns Ray-Ban and Oakley and makes frames for brands like Armani, Prada and Chanel. According to 2015 Euromonitor International’s report, Luxottica’s closest rival was Essilor, with a 13% market share, whereas competitors were lagging behind – Johnson & Johnson’s 3.9% market share is a clear example.

The combined company, to be known as EssilorLuxottica, would be by far the largest player in the eyewear market, relying on Luxottica’s retail network, manufacturing lenses for both glasses and sunglasses, as well as designing and producing frames. Another possible issue for Luxottica’s competitors could be represented by Essilor being a supplier of lenses for most of their manufacturing.

$121bn is the value of the global eyewear industry

It is believed that the agreement will deeply affect the global eyewear industry, which is worth about $121bn according to data from Euromonitor, and is considered one of the sectors with the highest growth opportunities. The prospects for the industry are positive, with a growth rate of over 2% expected in the industry by 2020.

The trend is being boosted by lifestyle changes due to urbanisation, an aging population, awareness of visual impairment and of sun-related eye damage, and a rising middle class in emerging markets (especially in Asia and Latin America). Of the 7.2 billion-strong world population, it has been noticed that 2.5 billion still need vision correction and about 5.8 billion people need UV protection for their eyes – definitely a huge market for the new giant EssilorLuxottica.

Reasons Behind the Merger

Despite the strong market power held by Luxottica and Essilor, and the positive trends in the eyewear industry, both companies have been struggling with slowing sales growth over the past few years, hit by rising competition from cheaper rivals and by the challenge posed by online distribution channels. The deal is aimed at creating an entity able to address growing eye care needs by exploiting the natural synergies between the two companies.

This takeover would allow the combined group to better address the growth opportunities resulting from strong demand in the eyewear market, which is being driven by increasing demand for corrective lenses and protective glasses.

The merger is expected to create synergies both in revenues and in costs ranging from €400m to €600m but also to remove the uncertainty related to the Luxottica’s leadership succession plans. The governance of the company will be equally shared by Luxottica CEO Leonardo Del Vecchio and Hubert Sagnières, the CEO of Essilor who will take the role of vice-chairman and deputy CEO of the new entity.

A Wider Plan

Since 2014, Luxottica has gone through three different CEOs, generating investor concerns that have hit the company’s share value. The merger with Essilor could represent an effective solution to the uncertainty created over the last two years, considering the 20-year age difference between Mr Del Vecchio and Mr Sagnières.

The deal can also be considered a response to the change in strategy of the two large French luxury groups Kering and LVMH. Reports suggest that LVMH may be interested in buying 10% of Marcolin Group, an Italian eyewear company owned by the French private equity firm PAI Partners. The LVMH agreement could also involve investment in Marcolin operations and eventually led to the creation of a new company in order to fully internalise its eyewear business, following Kering’s example.

This decision is part of a wider trend that is seeing luxury brands vertically integrate their suppliers in order to get more control over their own products and brand image. Luca Solca, a luxury goods analyst at Exane BNP Paribas, said:

“If confirmed, the deal could mean that LVMH is preparing to integrate vertically in the eyewear business through the acquisition of production capacity from Marcolin as well as a distribution network similar to Kering eyewear.”

Given the possible future threat represented by luxury brands taking control of their eyewear business, Luxottica-Essilor deal might be seen as a defensive move aimed at protecting Luxottica’s current unquestioned leadership in the eyewear market from these possible future scenarios.

Cultural Integration

From a strategic point of view, the merger seems quite natural: Essilor’s lens-making business goes perfectly with Luxottica’s frames manufacturing ability and retail presence. The real challenge would be to achieve a profitable cultural integration of the two companies since Essilor see itself as a high-tech medical company aimed at “improving lives by improving sight” whereas Luxottica is more focused on the design of its frames that are almost seen as fashion items.

The biggest opportunity of the merger could be to combine these two different approaches to the eyewear business, a classic trade-off between function and aesthetics. If achieved, this cultural integration could create extraordinary value for stakeholders and differentiate EssilorLuxottica’s offer from that of luxury groups such as Kering and LVMH.

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