Dreams Come True: Luxottica and Essilor to Merge

Luxottica Cover

On January 16, 2017, Italy-based eyewear leader Luxottica SpA and French lensmaker Essilor International SA announced one of the largest cross-border mergers ever in Europe. The combined company, which should have an estimated market value of about €47bn (pre-synergies), will be a global leader in the €90bn fast-growing eyewear industry.

About Luxottica Group SpA

Luxottica is the world’s largest eyewear company. Founded in 1961 by Leonardo Del Vecchio, who to this date is CEO and Executive Chairman, it is headquartered in Milan, Italy and over the years has expanded its presence to more than 150 countries across 5 continents. The company is currently listed in Milan and New York.

As a vertically integrated business, the company designs, manufactures, distributes and retails its products. Its portfolio includes both proprietary brands, among which Ray-Ban, Persol and Oakley, as well as licensed brands, including Giorgio Armani, Bulgari and Valentino.

Luxottica’s strategy so far has consisted of a continued expansion in the eyewear and eye care sector either organically or through acquisitions, 10 of which took place over the past 6 years. This approach has proven to deliver consistently positive results: FY2015 net sales of €9bn show a 5-year CAGR of 11% and FY2015 net income of €804m is more than double net income recorded in 2010. Moreover, over the same time span the company has seen a remarkable reduction in leverage, measured as Net Debt to EBITDA, which has dropped from 1.8x to 0.5x. The company will report annual results for 2016 on March 1, although 2016 adjusted 9-month net sales of €6.94bn are in line with the prior year figure (€6.95bn).

Mr. Del Vecchio, through his holding company Delfin, is the major shareholder with a 61.9% stake. Other big owners are Giorgio Armani (4.7%) and Deutsche Bank Trust Company Americas (5.49%).

About Essilor International SA

Essilor is a French company founded in 1849 and listed in the Euronext Paris. The group’s historical activity has been producing corrective (ophthalmic) lenses of which it is, as of today, the world’s largest manufacturer. More recently, it is has also expanded its operations in the sun and reading glasses businesses as well as in the production of ophthalmic instruments and equipment.

With as many as 250 acquisitions completed in 10 years, the company has been growing quickly, and profitability has been consistently improving. Revenues and net income have both tripled since 2004, reaching respectively €7bn and €757m in 2015. Essilor will post 2016 full-year results on February 17, and has reported 2016 9-month net sales of €5.31bn, up 5.5% from the prior year figure (€5.03bn).

Essilor had been included in Forbes’ ranking of the World’s 100 most innovative companies. It currently holds 7900 patents and operates 5 R&D centers, in which it has invested more than €200m just in 2015. In that same year, the company has launched more than 250 new products.

Industry Overview

The eyewear industry is heavily dominated by the two players in question: about 70% of all glasses sold are from Luxottica, and Essilor commands a similar presence in the lenses industry. There are currently many different smaller players in the industry, such as niche, luxury companies like Gucci (owned by the France-based holding company Kering), or innovative start-ups like the US-based Warby Parker. Other than these, other main players in the industry include Italy-based Safilo Group S.p.A., US-based multinational Johnson & Johnson, and a host of smaller players such as Germany-based manufacturer of optical systems Carl Zeiss AG.

According to data compiled by Essilor, approximately 4.5bn people are in need of vision correction and over half of them still require correction, especially among developing countries (Asia, Africa, and Latin America). Furthermore, Euromonitor reports that the industry is set to enjoy a sustainable growth rate of 2.5% until the end of the decade. Although the largest players reach high levels of vertical integration, there are many up-and-comers working to disrupt the supply chains of Luxottica and Essilor, either through selling goods directly to customers, or by means of bypassing traditional distribution networks through a range of e-commerce solutions. Moreover, the industry exhibits a remarkable consolidation trend, best exemplified by the long history of acquisitions perpetrated by Luxottica’s iconic founder Leonardo Del Vecchio, as well as by Essilor’s recent acquisition of UK-based Vision Direct Group Ltd., amongst others.

Despite the prospects of growth, the industry faces an important structural challenge.  Not all types of glasses are regarded by consumers as essential goods (e.g. sunglasses). This can have a relevant impact on revenues, especially in periods of economic downturn. In addition, developing markets have gradually acquired a very important role in relation to the future prospects of the industry. A number of additional risk factors come with expansion in developing countries, translating primarily in higher revenue volatility and exchange rate risk.


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