The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Yawen Chen

LONDON, April 10 (Reuters Breakingviews) - Prada 1913.F is getting a discount but not a good deal. After weeks of talks with Michael Kors-owner Capri CPRI.N, the Hong Kong-listed Italian group agreed to pay 1.3 billion euros ($1.4 billion) for Versace. Given Capri paid $2 billion for the brand famous for its Medusa logo in 2018, that seems like a bargain. Yet it may still prove to be pricey.

Closing deals amid a trade war sounds risky. Prada CEO Andrea Guerra, an M&A veteran who formerly ran Italian eyewear maker Luxottica, almost walked away, says the Wall Street Journal. Still, Versace brings a fresh bold glamourous style to family-owned Prada, which is famous for its more elegant Miu Miu brand. And Guerra managed to negotiate the price down from the previously discussed $1.6 billion.

Yet this expansion still comes at a cost. Assume Versace brings in $900 million in sales in 2028, as estimated by seller Capri, up from this year’s forecast $810 million, and Prada is paying over 1.5 times that year’s revenue. That’s higher than $3 billion UK peer Burberry’s BRBY.L 1.3 times multiple on forecast 2028 sales, according to Visible Alpha.

And that multiple may rise further if Prada wants to spruce up the brand. Around 14% of Versace’s revenue comes from wholesale distributors, and a quarter of its own retail network is housed in discount outlet stores. Closing those down in favour of higher-end boutiques could see revenue fall in the short term, according to Bank of America analysts. Assume a third of the wholesale and outlet network is shut, Versace’s 2025 revenue would fall to just $680 million.

Then there’s the most challenging part: reversing the damage that Versace has suffered in recent years. The brand’s sales fell 20% year-on-year in the nine months to December. That will likely involve heavy investment in design and marketing. And yet even today, the deal’s financial return looks threadbare. Assume Versace’s operating margin hits 9% at the higher end of Capri’s projection for it in 2028, and the EBIT would be $81 million. Take off tax, and the return on Prada's investment would be just 4%.

To be sure, global brands like Versace rarely come on the market in an industry dominated by family businesses. And Prada may be wary of standing still while bigger rivals like LVMH LVMH.PA have been scooping up companies such as Italy’s Loro Piana. Yet with the global economy souring, and trade wars intensifying, there may be better buying opportunities down the road.

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CONTEXT NEWS

Prada said on April 10 it will buy smaller Italian rival Versace from Capri Holdings for 1.25 billion euros, which includes its debt.

“The acquisition of Versace marks another step in the evolutionary journey of our Group, adding a new dimension, different and complementary,” Prada’s Chief Executive Officer Andrea Guerra said in a statement.

(Editing by Neil Unmack and Streisand Neto)

((For previous columns by the author, Reuters customers can click on CHEN/yawen.chen@thomsonreuters.com))