Coverage: Burberry worries about potential takeover

In an interesting turn of events, Burberry is searching for a mystery investor who as accrued a 5 percent stake in the British luxury design house.

The surprise announcement has led many to speculate whether the company might be a potential acquisition target.

Bryce Elder, Arash Massoudi and Patrick Jenkins of the Financial Times had the day’s mysterious news:

A mystery investor has built up a stake of close to 5 per cent in Burberry, prompting Britain’s best-known luxury fashion brand to seek help from its financial advisers to defend it against any potential takeover bid.

Burberry, with a market capitalisation of £6bn, sought aid after its board could not determine the identity of the stakebuilder.

A person close to the company said that it had attempted unsuccessfully to ask HSBC, which is listed as the custodian for the position, to reveal its client.

The fashion company, which has seen its market value drop by more than a quarter amid a slowdown in Chinese demand, has called on its existing bankers at Robey Warshaw to help, according to people close to the situation. The group’s corporate broker, Morgan Stanley, is also looking into the matter.

Analysts suggested that rival luxury goods groups such as LVMH, or private equity investors, could be behind the transaction with a view to launching a takeover. In a takeover, Burberry could be valued at £8bn, or £17 a share, according to analysis from Macquarie.

“Burberry is one of the few luxury brands without family interest and thus an easier target for acquisition,” said Macquarie analyst Daniele Gianera.

Thomas Mulier of Bloomberg described how the mysterious investor has the company concerned about a potential takeover:

Burberry asked its advisers at Robey Warshaw to help prepare a defense for a possible bid after a mystery investor built up a stake of about 5 percent in the trenchcoat maker, the Financial Times said, citing people close to the matter it didn’t identify. The company asked HSBC Holdings Plc, which is the custodian for the stake, to identify the client, though the bank refused, the newspaper said. HSBC reported the stake last month and said March 4 it dropped below 5 percent. A Burberry representative declined to comment.

Bid speculation is increasing after Burberry shares slid 27 percent in the past year. The company in January reported Christmas revenue that trailed its own forecast, hurt by a slump in demand in Hong Kong. Burberry is scaling back stores, cutting bonuses and consolidating products under one label after forecasting earnings will probably fall for a second straight year.

“In terms of a takeover target, Burberry’s valuation had reached the point where shareholder activism was increasingly likely in our view,” said John Guy, an analyst at MainFirst Bank AG. LVMH and Richemont are two major trade buyers that would have sufficient resources to make a bid, while Qataris could figure among private-equity bidders, he said.

Saabira Chaudhuri of The Wall Street Journal explained how the company has been struggling in recent years, along with fellow luxury design houses:

Analysts and investors said any possible takeover bid for Burberry is unlikely to be mounted out of Europe, where luxury companies such as Kering SA and LVMH Moët Hennessy Louis Vuitton are grappling with their own issues or don’t have deep-enough pockets. A more likely buyer is a sovereign fund or private-equity firm.

Burberry has reported lackluster sales in recent quarters as the company continues to be buffeted by a slowdown in China, its largest and most important market. The company in January reported flat same-store sales growth for the fiscal third quarter.

Burberry’s store footprint is more heavily weighted toward China and Hong Kong than that of rivals, places where it has seen sales suffer lately. The fashion house has fewer stores in Europe—outside the U.K.—and Japan, leaving it less able to capitalize on the influx of Chinese visitors, who have traveled to take advantage of currency fluctuations.

Burberry is expected to announce big changes at its full-year results in May, triggering ratings upgrades by some analysts in anticipation. The company in January said Burberry is accelerating initiatives to enhance productivity and efficiency and is addressing how to optimize future revenue opportunities, investment plans and its capital structure.

Shares have dropped 7.7%, excluding Tuesday’s move, since design chief Christopher Bailey added the title of chief executive in May 2014. By contrast, rival Kering’s shares have climbed 2.1% over this period while LVMH’s have jumped 21%.

Despite the mounting macroeconomic headwinds the company faces, Mr. Bailey—whose dual role as chief creative officer and CEO is unusual in the industry—is widely seen as having continued along the path of a strategy he helped create under former CEO Angela Ahrendts who left to head retail at Apple Inc. The company has invested heavily in building out a digital strategy and recently moved to end a decades-old license agreement in Japan, where it now directly operates its stores.