Will Luxottica’s $54 Billion Deal Work?

MILAN, Italy — Even the most obvious of deals needs the stars to align. It has taken a long time for the spectacles industry to create a major player that makes both lenses and frames, despite the evident logic of combining the two. Now French lens-maker Essilor International SA and frame designer Luxottica Group SpA are merging to create a €51 billion ($54 billion) glasses giant. The deal is good for both sides — especially Luxottica and its 81-year-old founder and 63 percent shareholder Leonardo Del Vecchio.

Keeping lenses and frames separate does not look wise as the industry tries to establish a new market for "smart" glasses. A deal between Essilor and Luxottica should lead to more productive R&D. Both sides were already encroaching on each other's turf.

For Luxottica, the competitive dynamics of luxury have become more challenging as the big brand houses have sought to capture more value from the eyewear market. Kering took its eyewear business in-house a couple of years ago. A deal should help insulate the Italian company from that threat. There was a risk of rival Safilo Group SpA doing a tie-up with Essilor. Better to get in there first.

For Luxottica's independent shareholders, trading into a merged company will be a big step up. Del Vecchio, who has parted ways with a succession of chief executive officers in recent years, will be diluted down to 31 percent.

True, the starting governance of the enlarged group will be far from normal. Del Vecchio will be executive chairman and chief executive officer, with Essilor chief executive officer Hubert Sagnieres executive vice-chairman and deputy chief executive officer with "equal power". Both will be able to call board meetings and put items on the agenda. Both will have to agree with each other's decisions.

In practice, the two companies will carry on pretty much as they are in the short term as wholly-owned business units under an overarching holding company.

The trick will be realising synergies within this fudged structure. These are put at €400 million to €600 million, perhaps taking about three years to come through. Taxed and capitalised, they have a net present value of €2.5 to €3 billion allowing for one-off costs. The market is confident they can be delivered and perhaps exceeded: the combined value of the duo jumped €5 billion on Monday. The exuberance seems somewhat premature given the deal will face some antitrust scrutiny.

Luxottica arguably has more to gain here. That probably explains why Del Vecchio was willing to accept a slight discount on the terms, which give Luxottica about 1.5 percent less of the enlarged company than would be justified based on Friday's market caps, although that is consistent with the pair's three-month averages.

For Essilor shareholders, the investment case of their high-tech healthcare manufacturing company will be transformed by fusion with a luxury brand business. The logic's there. But they are still picking up an influential shareholder who has enjoyed total domination over his company for decades. Investors in Luxottica knew they were buying a backseat ticket. Their Essilor counterparts will expect their interests to be minded.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

By Chris Hughes and Andrea Felsted; editor: James Boxell.

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