Richemont's Lancel: a risky bet on a struggling brand

Reuters

* Turnaround could take eight years, sources say

* Private equity firms said to be showing interest

* Venerable brand ripe for revamp, experts believe

By Astrid Wendlandt

PARIS, Oct 28 (Reuters) - Potential buyers of Lancel seereviving the loss-making leather goods maker as a high-riskgamble that could take at least six or eight years to pay off,sources close to the matter say.

Facing a struggle to offload the business, Swiss parentRichemont would be ready to pay for two years of losses- up to an estimated 20 million euros ($28 million) - to enticebidders, the sources say.

So far private equity firms Change Capital and Lion Capitalhave expressed interest while Asian group Swire is looking toteam up with a private equity firm to make a bid, according tothe sources.

Another potential buyer, who has not made up his mind yet,is Jacques Veyrat, the former CEO of private French tradinggroup Louis Dreyfus who used to run its Neuf Cegetel telecomsunit.

Veyrat left Louis Dreyfus in 2011 with a golden parachute of270 million euros, according to the French press. He has sinceset up the Impala group, which invests in companies in distress.

Veyrat, Swire, Lion Capital and Change Capital declined tocomment, as did Lancel and Richemont.

People close to the talks say the bidding process forLancel, which had already been going on for months, could lastseveral more weeks.

Lancel is run part-time by Fabrizio Cardinali, CEO ofDunhill, another Richemont brand.

Lancel has hired a new designer, Nicole Stulman, who waspreviously at Reed Krakoff, Hermes and Celine and doesnot have a head of merchandising to work with since that personhas left for Dunhill, sources close to the sale process said.

Other key people at the company are either on sick leave orhave not been replaced, the sources said.

Lancel's difficulties come as the luxury sector as a wholeremains resilient despite a slowdown in China, continuing togrow, although at a slower pace than in previous years.

PRIVATE EQUITY

The relationship between private equity and fashion brandscan be difficult because the typical three- to five-yearinvestment horizon may be too short to turn a label around.

Private equity deals are usually financed by debt, whichputs pressure on the fashion brand when it needs to invest inmarketing and new shops.

Lanvin, acquired by Taiwanese media magnate Shaw-Lan Wangfrom L'Oreal in 2001, took more than seven years to becomeprofitable. TPG struggled for nine years to restructure theleather goods brand Bally before selling it in 2008.

There have been few successful revamps of struggling brandsthat are still going concerns. Carven, Balenciaga and Lanvin laydormant for decades before they were acquired, allowing theirnew owners to make a fresh start.

Lancel was founded by accessories designer Angèle Lancel in1876, remaining in the hands of her descendants until it wasacquired in the late 1970s by the Zorbibe bothers, who with thenchief executive Sidney Toledano, now Dior CEO, launched the hitbucket-shaped Elsa bag and made Lancel a profitable business.

Industry executives say Lancel was making margins higherthan Louis Vuitton - today's market leader - when Richemontbought it in 1997.

"All my girlfriends in the 1990s dreamt of having a Lancelbag," said Serge Carreira, who lectures on luxury at theInstitut d'Etudes Politiques in Paris, known as "Sciences Po".

Lancel had not expanded internationally or creatively as itsrivals did, he said.

Lancel makes more than 80 percent of its sales in France andin the year to end June, it had an operating loss of 10 millioneuros on revenues of 135 million euros, sources close to thematter said.

Richemont, the world's second biggest luxury group, does notpublish separate sales and profit figures for its brands, whichinclude Cartier and Van Cleef & Arpels.

Longchamp, founded in 1948 and still owned by the foundingCassegrain family, has annual sales of 500 million euros.

"ELECTRIC SHOCK"

"What Lancel needs in an electric shock in terms of design,marketing, store concept and image," says Boston ConsultingGroup senior partner Jean-Marc Bellaiche.

Analysts say Lancel needs to enter the accessible segment ofthe luxury market, alongside Coach, Michael Kors and Longchamp with handbags costing 200-800 euros.

Lancel lost credibility at the high end of the luxury marketby offering excessive discounts and putting out staid,old-fashioned designs, such as the Brigitte Bardot bag in 2010 -a 1970s style version of the bucket bag - and the documentholder Isabelle Adjani bag in 2008.

"Lancel's products, while perfectly fine, look a bit datedand are not a must-buy," said Hugh Devlin, a consultant at legalfirm Withers LLP, who specialises in luxury and fashion brands.

"With the right creative team and strategy, that coulddefinitely change but whoever buys it will need to be preparedto take a risk."

Lancel clearly thinks it can make it as a luxury brand. Afew months ago, it introduced an ostrich leather "L" bag costing4,500 euros, emulating Gucci and Louis Vuitton's recent efforts to move upmarket.

Carreira disagrees. "You do not become a luxury brandbecause you sell a bag for 4,000 euros," he said.

To rebuild its name in the crowded accessories market,experts say Lancel should do some ready-to-wear, as Longchampdid, to stimulate traffic in shops and rejuvenate itself.

Another potential investor who looked at Lancel said it hadsuffered from under-investment and excessive managementturnover.

Having had about a dozen chief executives since 1997, thecompany will now need to be given time by its new owners toimplement long-term strategy, industry observers said.

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