Why Would Mayhoola Pay Such a High Price for Balmain?

PARIS, France — Emmanuel Diemoz, chief executive of Balmain, confirmed that Mayhoola for Investments — the Qatari owner of Valentino widely believed to be a vehicle for Sheikha Mozah and other members of the country's ruling family — has acquired a majority stake in the French fashion house for an undisclosed sum.

The deal marks the end of a series of long negotiations between the Qatari fund and Balmain's owners, including the family of former chief executive and controlling shareholder Alain Hivelin, which decided to give up control of their 30 percent stake in February. The French fashion house also attracted bids from private equity funds, including L Capital, an investment firm backed by LVMH. French, British and Asian investors were also reported to have expressed interest in Balmain.

The deal is said to have valued Balmain at close to €500 million. But, still, for a business which generated annual revenues of €121.5 million last year — and just over a decade ago was facing bankruptcy — the price seems high. The rumoured valuation implies a multiple of around 14 times earnings before interest, tax, depreciation and amortisation (EBITDA), putting the company at a premium to Gucci-owner Kering, which is valued at 8 to 9 times EBITDA, but in line with more expensive stocks such as Prada and Jimmy Choo.

So why the high price?

Scarcity of targets

Balmain is one of Europe’s few remaining independent fashion houses and would have certainly attracted attention from investors keen to capitalise on the opportunities for European luxury brands in growing markets like China and India.

In the past five years, private equity firms have acquired or invested in a number of luxury brands, including Roberto Cavalli, Versace, Moncler, Bulgari and Anya Hindmarch. Indeed, demand for established fashion brands is high, underscored by the announcement on Monday that Investcorp, another Gulf investment firm, has bought a majority stake in Italian menswear firm Corneliani in a deal that valued the company at $100 million, adding to a string of luxury acquisitions by foreign buyers.

Brand buzz

In recent years, Balmain has managed to generate significant brand buzz, closely linked to the company's social media prowess. Indeed, since the 2011 appointment of the young, social media-savvy designer Oliver Rousteing, Balmain's brand profile has grown by leaps and bounds. Rousteing, who has focused intently on raising Balmain's visibility by connecting directly with digital fans, has attracted 3.4 million followers on Instagram, as well as a 'Balmain Army' of celebrity supporters, including the Kardashians and models Gigi Hadid, Joan Smalls and Rosie Huntington-Whiteley. Yet how much of this value is actually embedded in the brand and how much rests more squarely with Rousteing and his celebrity circle is debatable.

What’s more, while Balmain’s recent collaboration with high street fashion retailer H&M was a media-generating success, there is a significant gap between the younger audience that follows Balmain on social media and bought into the H&M collection, and the demographic that can afford the mainline, which includes pieces like a double-breasted leather blazer priced at over $3,000 and evening gowns at over $5,000.

Investment bank Bucéphale Finance, which handled the sale, released a statement on Tuesday evening, saying the investment by Mayhoola would allow Balmain “to accelerate its development, notably with the opening of new stores abroad.”

Importantly, Mayhoola will also invest in the development of an accessories line, which could help the company expand its offering into some lower-priced items like handbags, shoes and key rings to help maintain its connection with its younger audience.

Sources with knowledge of the Balmain talks said Mayhoola’s long-term plan is to combine Balmain and Valentino into one luxury group along with its other brands and eventually list the company, according to a report in the Financial Times.

Whether Balmain can grow into this hefty valuation remains to be seen. But whenever there are multiple bidders for a scarce asset, you can be pretty sure that the price at which a deal is done usually ends up on the high-end of the range.