Following a series of expansions and acquisitions in the early 2000s Prada has found itself with a large amount of debt maturing over the next year. Since Prada is challenged with raising €1 billion to cover loans maturing in the coming year, the analysts at GCP have researched several options for the board to consider. These alternatives include issuing sort term bonds, forming a joint venture, and completing an IPO. Considering the pros and cons of each option while heeding the concerns and preferences of the Prada family, GCP recommends the board pursue an IPO.
Outlined in this memo the board will read the rationale behind pursuing the IPO as well as information on alternative options. Luxury Goods – Market Outlook
To become an attractive IPO option for investors Prada needs to demonstrate it has the correct market position to be profitable in the coming years. Over the past 10 years the luxury goods market has seen steady growth despite significant negative world events and has expanded to a €172 billion industry.
The European market and Americas make up a market share of 37 and 31 per cent respectively as well as growth rates of three and one per cent . While these markets represent the cash cows for Prada, the Asian Pacific market is where the company seeks to position itself moving forward. Though this market represents 16 per cent of the global market, it has seen an average growth rate of 27 per cent over the past three years. Prada has already begun to capitalize on the growth in this region as nearly one third of sales in 2011 were from this region. With the world economy recovering from the great recession and the Asian (specifically Chinese) economies have thrived and are giving birth to a large middle class with increased demand for luxury goods. With five year projections indicating continued double digit growth (10-11 per cent) Prada should increase the presence of retail locations throughout the region to best position itself in the market. Alternatives for Raising Capital
Two main alternatives to an IPO have been explored to raise the necessary capital in the short term. The first option is to issue bonds through two possible avenues. There is interest in the Euromarkets for bonds issued by quality companies. Though Prada has not been rated to issue bonds, estimates put the company’s rating at A- (on par with Bulgari and LVMH). We project Prada could potentially issue €750 million in five-year bonds. While this would help the company get closer to the €1 billion needed there would still be a significant shortage. Another avenue GCP explored was to issue short term Dim Sum Bonds. These securities are Yuan backed bonds with a maturity span of 2-3 years and a return of three per cent . While both bond options could be completed with relative ease, doing so would not change the strategic position of the company and would only delay Prada’s debt obligations. Even with the prediction of strong sales growth in Asia-Pacific markets, Prada would be best served to clear the debt off its books sooner than later.
The other option to raise capital is to enter a joint partnership with a private equity firm. Prada is no stranger to working with private equity groups in the past and has even received unsolicited offers with an attractive premium to the family members’ controlling stake. This avenue, however, would go against the family’s desire to retain control over the company and thus does not align with the overall goals of raising capital. Preferences for sources of capital, country of issuance, and investors
Through initial research GCP has determined Hong Kong to be the preferred location of an IPO as the company would have a higher valuation than if it went public in Europe. Despite trading costs being higher, investors are still attracted to the market; L’Occitane International listed its IPO in Hong Kong and is currently seeing its stock trading at 45 per cent over the initial price. Also, Hong Kong is known for its low tax status since it has no capital gains tax. The IPO may not be a traditional issuance however due to Italy’s high tax rate (27 per cent) on dividends paid to foreign investors. To make the IPO more attractive Prada should consider a primary listing in Milan and make a Hong Kong depositary receipt available to Asian investors which would help minimize the transaction costs for foreign investors. Recommendation to Prada Board of Directors
Despite the Prada family’s initial concern losing control of the company through an IPO, this is most prudent choice of action to raise the necessary capital; also the family will be able to retain a controlling stake. As evidenced in the calculations in exhibit A the IPO would only require the company to sell 20 per cent of the available stock to raise the € 1 billion capital necessary. The family would take its equity already invested in the company and purchase the remaining 80% (or a percentage deemed appropriate by the family) and retain control over Prada. The IPO recommendation will not only raise the necessary capital to payback Prada’s debts but it could also be used to raise the capital necessary to fund expansion in the Asian-pacific market without the company needing to take on significant debt again. Exhibit A
Cite this Financial Problems Prada
Financial Problems Prada. (2016, Jul 02). Retrieved from https://graduateway.com/prada-ipo/