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Luxottica and Essilor to merge in blockbuster eyewear deal

Luxottica Group SpA (LUX) and Essilor International SA announced Monday, Jan. 16, that they would merge, creating an eyewear giant with combined revenues of over €15 billion ($15.96 billion).

The combined company will have a market value of over €46 billion based on the companies’ respective Friday closing market capitalizations. 

The companies said in a statement that they will also have combined net Ebitda of about €3.5 billion (derived from their 2015 results). In the medium term, they expect revenue and cost synergies of €400 million to €600 million once the merger is completed, with the synergies to “accelerate” over the long term. In a presentation to analysts, the companies said that they expect €200 million to €300 million in synergies from market growth acceleration, including online sales and growth in emerging markets; €150 million to €200 million from supply chain optimization synergies and €70 million to €100 million from reduced administrative and purchasing costs. 

The merger comes about a year after Luxottica founder Leonardo Del Vecchio returned to the company as executive chairman following rapid management turnover. He pledged to double the company’s revenue to €15 billion by 2024.

Through his Delfin Sarl group, Del Vecchio holds 61.9% of Luxottica’s shares, which are listed on both the New York Stock Exchange and Milan‘s Borsa Italiana.

Del Vecchio will exchange his stake in return for 0.461 newly issued Essilor shares per Luxottica share, after which Essilor will acquire all remaining outstanding Luxottica shares at the same ratio. Through Delfin, 81-year-old Del Vecchio, the second-richest person in Italy, will own 31% to 38% of the new EssilorLuxottica and will be the company’s largest shareholder. 

Mediobanca SpA is financial adviser to Delfin, which tapped BonelliErede and Bredin Prat as its outside counsel.

Essilor retained Citigroup Global Markets Ltd. and Rothschild & Co. as its financial advisers and is taking legal advice from Cleary Gottlieb Steen & Hamilton LLP.

Del Vecchio and Essilor CEO Hubert Sagnières will both join the combined company’s board. Besides Sagnières, Essilor will also nominate two employee representatives; one representative from Valoptec, a group of current and retired employees which owns nearly 12% of Essilor’s voting rights; and four independent representatives. In addition to Del Vecchio, Delfin will nominate three Delfin representatives and four independent representatives. 

Del Vecchio will serve as executive chairman and CEO of the combined company, while Sagnières will serve as executive vice chairman and deputy CEO “with equal powers as the Chairman and CEO.” They will also retain their current roles as executive chairman of Luxottica and CEO of Essilor, respectively. 

Luxottica is the world’s largest eyewear company, with brands including Oakley, Oliver Peoples, Persol and Ray-Ban. The Milan-based company is also licensed to make frames for designers including Burberry Group plc, Michael Kors Holdings Ltd. (KORS), Prada SpA, Ralph Lauren Corp. (RL) and Tiffany & Co. (TIF). Luxottica also formed a partnership with Alphabet Inc.‘s (GOOGL) Google on its Google Glass (pictured) project, which the companies said at the time will include Luxottica’s Oakley and Ray-Ban brands. 

In addition to its eyewear, Luxottica operates over 7,000 stores as of its most recent annual report, including Sunglass Hut and LensCrafters, as well as the optical businesses at Sears Holdings Corp. (SHLD) and Target Corp. (TGT).

The move to acquire France’s Essilor, the largest manufacturer of ophthalmic lenses, fits squarely within Luxottica’s oft-touted strategy of vertical integration.

The combination of the two companies has long been contemplated, with former Luxottica CEO Enrico Cavatorta saying as recently as 2014 that the two groups had discussed a merger but had not been able to hammer out the details. 

“With this agreement my dream to create a major global player in the eyewear industry, fully integrated and excellent in all its parts, comes finally true,” Del Vecchio said in a statement. “It was some time now that we knew that this was the right solution but only today are there the right conditions to make it possible.”

He said the deal has been in the works for four years.

“We were interested in this for the quality of the lenses,” Del Vecchio said on a call with analysts. “We have the brands to sell our things and what was missing was the quality of the lenses.”

Although EssilorLuxottica will control about 15% of the global eyewear market, the two executives largely dismissed the possibility of a protracted antitrust battle.

“I don’t think that this is going to change things much from an antitrust point of view,” Del Vecchio said on the call, adding that he expects the antitrust question to be settled by next year. “We hope it will actually happen before,” he added.

In fact, Sagnières framed the increased concentration as a positive for the eyewear industry.

“Leonardo and I, we have been vocal…that this industry need[s] a strong leader,” he said. “15% market share is better than 6%. So my message is, it’s a great first step.”

While the merger has long been considered, analysts as recently as last summer considered it an unlikely prospect. 

Fidentiis Equities SVSA told The Deal in August that Luxottica had about €6 billion to €7 billion in dry powder that it could spend on acquisitions without raising new equity. Checchinato predicted that the company would pursue retail distribution assets in Europe, pointing out that Luxottica generates 21% of its revenue in Europe, less than half than the amount generated in North America.

“Luxottica is a client of Essilor, but it’s getting more and more independent from it, as it builds lens machining and manufacturing capabilities in each continent,” Exane BNP Paribas analyst Luca Solca told The Deal at the time. “There was a time when a possible tie-up was considered. But I think this is less likely now.”

Solca instead predicted that Luxottica would pursue digital acquisitions, a move that Essilor has itself made.

On Aug. 16, for example, Essilor agreed to buy online glasses retailer MyOptique Group Ltd., backed by private equity firms Acton Capital Partners, Beringea LLC, Cipio Partners GmbH, Index Ventures, Korys NV and Highland Capital Partners (UK) LLP. Terms of the deal were not disclosed, although Index Ventures said MyOptique generates revenues of £57 million ($69 million), and TechCrunch reported that the sale price was about €140 million. Essilor had announced a similar deal on Feb. 23, buying London-based Vision Direct Group Ltd. for undisclosed terms. Backed by Octopus Ventures, the online contact lens retailer’s revenues were about £33 million. Essilor also owns, the Vancouver-based online eyewear retailer which it acquired in 2014 for C$430 million (then $386 million), and outdoor sunglasses maker Costa Inc., for which it paid $284 million in November 2013.

In its biggest deal to date, announced July 28, 2013, Essilor paid $1.73 billion to buy out joint venture partner PPG Industries Inc.‘s stake in lenses maker Transitions Optical Inc. From Transitions’ inception, Essilor had held a 49% stake and PPG the remaining 51%.

The boards of both Luxottica and Essilor approved the transaction, which is expected to close in the second half of 2017.

Luxottica’s Milan-listed shares rose 8.3% to €53.65 on Monday. Essilor shares closed at €114.20, up 11.9%. 

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