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Luxottica, from an acquirer to be acquired?

  • How will the merger affect Luxottica and Essilor?
  • Will European Commission approve the amalgamation despite monopoly concerns?
  • What will be the benefits for masses?

 

The vertical integration made Luxottica the world leader in the eyewear industry, this was mainly achieved by mergers and acquisitions and was explained in detail through Televisory’s previous blog on the subject.

In early 2017, an ironic development hit the market, wherein, Essilor, the largest optical lens maker and Luxottica, the biggest frames manufacturer decided to merge. Further, Luxottica plans to acquire Essilor. The firm, which amassed innumerable companies became the target of acquisition. The all-stock merger will lead to an establishment of a combined company with the market valuation of €47 billion and this received a positive response from the market. The stocks of Luxottica and Essilor rose by 8% and 13%, respectively. Although, this will create a one-stop solution for the customers, who will receive frames and lenses from an integrated player, it will cut the margins of other players by impacting their market share.

The expected combined financials represented in the below table signifies the high value of the companies involved in the merger and hence, there is a related turmoil in the market.

Moreover, both these entities strongly believe that their businesses complement one another and will add revenue and cost synergies as shown in the diagrams below. The entire process from research, production to distribution will be streamlined and would result in a better product mix with strong cross-selling potential. Essilor will get access to Luxottica’s retail channels, while Luxottica will attract heightened online presence. According to Cerno Capital Partners, Essilor is expected to contribute more to Luxottica’s supply chain by improving the supply of lenses from current 30% to almost 90%. The brand portfolio of the firms if combined will comprise major proprietary brands such as Oakley, Ray-Ban, Vogue, Essilor, Varilux, Crizal, Kodak Lens and licensed brands like Chanel, Bulgari, DKNY, Giorgio Armani, etc.

The financial data (represented in the 1st table), when examined in conjunction with the operational data (in the table below), proves that the merger will be a win-win situation for both the companies. The merger will create a European leader in the eyewear sector with access to large geography. Additionally, both the firms will gain from each other’s competitive edge and create a strongly integrated entity that will be existent in all aspects of the value chain. The production units and distribution centres in a country or region can be combined to save the cost, while those in other countries will ease the distribution of products to customers in these areas. In addition, the cost synergies from the merger will amount to nearly €300 million per annum, it is going to  boost the profits for the firm. The integrated entity will henceforth have revenues exceeding €15 billion, EBITDA margin of 23%, approx. 1,40,000 employees, roughly 10,000 patents and a presence in 150 nations.

The eyewear market in 2016 amounted to €80 billion and is projected to reach €118 billion by 2026 at a CAGR of close to 4% (Source: Statista). Essilor and Luxottica together will account for a whopping €47 billion of the €80 billion market and would turn around the future of the industry through an improved and coordinated supply chain management. Thus, considering the growth rate and the potential penetration, the amalgamated entity would still have a huge market to tap. There are still 2.5 billion people in the world, who require vision correction and 5.8 billion people need eye protection. It is only when companies with large and established operations come on board, the vision care can be provided to masses. Likewise, Hubert Sagnieres, CEO of Essilor stated that ‘Essilor and Luxottica would together eradicate poor vision by offering top vision solutions with the most suitable lenses fitted into the most suitable frames and by overseeing their timely delivery to all those who need them.’

The biggest concern although is whether the merger will be approved by the antitrust authorities as the merged entities will hold 17% of the global market share (in terms of the revenue), the next in line competitor being Johnson and Johnson with meagre 4% share. The pact could well be on the radar of regulatory authorities, specifically the European Commission.

There are two schools of thoughts with regard to the monopoly concerns. The first one stems from the fact that the merger will create a company that will have undisputed control over manufacturing, supply and retail. The bargaining power of competitors and customers will decline with the merger, dictating terms for suppliers and distributors, and there will be higher prices and lesser choices for customers.

Secondly, another school of thought is that the merger is a vertical integration, where Essilor becomes a supplier of lenses for Luxottica’s frames, hence, the deal will not lead to monopoly. The antitrust bodies usually have reservations with horizontal mergers, wherein a big competitor with same product line is the target for acquisition. This along with comparatively smaller market penetration is the reason that the deal has been cleared by competition watchdogs in Russia, India and New Zealand.

However, European Commission has raised concerns with the merger as both the companies are deeply rooted in the market. According to the commission, Luxottica is an established brand and has suppliers network, this will influence the opticians to purchase Essilor’s lenses and may eliminate other suppliers of lenses through means of tying and bundling. Essilor and Luxottica are thus, expected to offer concessions to appease the regulators in order to proceed with the merger.

Therefore, whether the merger would get the green signal from the regulator or not is yet to be seen (the decision will be taken by February 12, 2018), however, if the merger materialises, both the firms do have the capacity and ability to reach the emerging markets and initiate vision correction. But this will be solely achievable if the monopolistic nature of the transaction does not get converted into price dictatorship and unaffordability for the masses. At present, Luxottica majorly serves premium and luxury eyewear market. It will have to adapt to the mission of Essilor, ‘improving lives by improving sight’ and produce varied eyewear products serving the larger population to achieve the aim of the merger. Hence, both Luxottica and Essilor will have to maintain quality eyewear products and should not restrict their operations to an elite section of the market if they actually intend to fight poor vision globally.

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