The latest reports in the Italian press, which has a good relationship with Luxottica, indicate that the new management of the group may be interested in pursuing a merger with Essilor International, moving the group into the lens business, and the acquisition of Maui Jim, the main competitor to its own Oakley and Ray-Ban brands of sunglasses. The two projects were reportedly being pursued by Luxottica's chairman, Leonardo del Vecchio, and by the group's former chief executive, Andrea Guerra.
Luxottica announced at the beginning of September that Guerra was leaving the company, with immediate effect, after ten years at its helm. Guerra is set to be replaced by a “triumvirate,” formed by two joint CEOs and the group's chief operating officer (COO). Del Vecchio, the 79-year old chairman and founder of the group, is expected to be more active in the company's management. Under the new management structure, the group will have a CEO in charge of corporate functions and another who will oversee market development.
The company will create an executive committee led by Del Vecchio and comprising the two CEOs and the current COO, Massimo Vian. At a board meeting, the group's chief financial officer, Enrico Cavatorta, was appointed CEO in charge of corporate functions and interim CEO for markets. He has been with the group for many years and was regarded as a key candidate for Guerra's successor. Luxottica has started the search for a new CEO in charge of markets, insisting that it will be an external candidate. There has been speculation in the newspapers that possible candidates to become the second CEO are Gianmario Tondato and Bon Kunze-Concewitz. Respectively, they currently run Autogrill, the Italian catering group, and Campari, the drinks group. But, the daily Il Corriere della Sera reported a few days ago that Luxottica would prefer a manager located in the U.S. with experience in the luxury business or consumer goods. He should also have experience in e-commerce, sources says.
In its public statement about the management change, Luxottica said that the joint CEO structure will “ensure stronger management of the group, which has rapidly increased its size, complexity and global presence in recent years.” In an interview with Corriere della Sera, Del Vecchio said that Luxottica is undergoing a new phase with the new structure the company. The first phase was the establishment of the company by Del Vecchio in 1961. The second stage was Del Vecchio's decision ten years ago to take a step back by appointing Guerra, who was previously head of an Italian household appliances group, Indesit. Del Vecchio said that the triumvirate was necessary because the company has become too big to be run by only one person after having doubled in size over the past decade.
In the interview, Del Vecchio said that he discussed the new structure four or five months ago with Guerra, asking him to remain part of the team. Guerra viewed the proposal as a loss of faith in his management capacities and rejected the offer. “The breaking point was reached when I decided to proceed and he did not change position,” Del Vecchio said. Del Vecchio rejected claims that the two men had fallen out over the deal with Google to develop and distribute Google Glass eyewear or a failed merger with Essilor.
According to another Italian daily, La Repubblica, the two men's views started to diverge last year after Guerra had to convince Del Vecchio to drop plans to merge Luxottica with Essilor. The deal would have given Del Vecchio, whose family holding company Delfin owns 61.35 percent of Luxottica, a stake of only about 30 percent in the enlarged group but Guerra would have played second fiddle to Hubert Sagnières, the chairman and CEO of Essilor.
Guerra proposed to pursue the company's expansion through acquisitions and organic growth with the target of reaching sales of €10 billion in three years' time compared with €7.3 billion in 2013. The relationship seems to have soured further with the botched placement of part of Del Vecchio's stake on the market, according to La Repubblica. In September 2013, Delfin said that it planned to sell a 7 percent stake in Luxottica through an accelerated book-building offering to institutional investors. But the holding company only managed to sell a 3.8 percent stake at €27 a share for €486 million. In December, Del Vecchio said that Delfin would not sell any more shares in the company. In the interview with Corriere della Sera, Del Vecchio confirmed that he would have obtained a stake of more than 30 percent in the merged Luxottica/Essilor but the French had agreed to give the helm of the group to Guerra. He added that he took the decision not to proceed with the deal.
Del Vecchio admitted that he had been annoyed by the fact that it took Guerra three days in February to deny rumors that he would join the government as industry minister in the government of Prime Minister Matteo Renzi. Del Vecchio does not believe that Guerra has the skills to be a politician but “would be perfect” as a coordinator of the government's industrial assets. He also considered him as the right person to manage the Italian fashion group Giorgio Armani, which has a 4.75 percent stake in Luxottica.
But the current management overhaul is largely seen as a move by Del Vecchio to regain a tighter grip on the group's management. In its public statement, Luxottica said that Del Vecchio, who has been the chairman of the board since he founded the company in 1961, is the “original inspiration behind the strategic vision of the group” and “will ensure a smooth organizational transition, overseeing the board and supporting (its) further success.”
Del Vecchio told Corriere della Sera that he has always had an operational role within the company but he did not interfere because Guerra was doing a good job. The change of pace is motivated by his intention to “make things go even better,” he added. He said that after 10 years with Guerra the company will now be managed for another decade by a three-man team and that he expects the group's revenues to grow by at least 6-7 percent a year and double again in size over the next decade. He added that the growth could be accelerated by acquisitions, if profitable opportunities arose.
Rumors about Guerra's departure had been circulating in the industry and press for a few weeks. But the transition was expected to be smoother, with Guerra leaving toward the end of the year with the expiry of his contractual mandate. Nevertheless, the supervisory board meeting to approve the management changes was held in a “very serene atmosphere,” according to members of the board.
Guerra is estimated to be quitting Luxottica with a severance package of about €45 million that includes nearly €34 million from the sale of 813,500 shares at €41.5 each to Del Vecchio. Among other things, he will receive a €10 million redundancy incentive and €800,000 for a non-competition agreement lasting 24 months. In another interview with Il Sole 24 Ore, the Italian financial daily, Del Vecchio said that the non-competition clause was not included in order to stop Guerra from moving to Safilo. He also added that his son Claudio Del Vecchio, who runs the apparel group Brooks Brothers, is not due to hold a management role in the company.
Cavatorta confirmed that the group's strategy has not changed with Guerra's departure. It will continue to grow in emerging markets and still aims to reach revenues of €10 billion in 2016, he said.
The discussions between Luxottica and Essilor started about one a half years ago. During a conference call with analysts, Cavatorta said that the project to merge with Essilor is no longer on the table and reiterated that it was not a bone of contention between Guerra and Del Vecchio. The deal would have been “very complex” to carry out and Luxottica decided to drop the project for financial, organizational and governance reasons, he said.
However when asked during the conference call whether there had been a change of heart regarding Essilor, Cavatorta answered with an intriguing “there has been no change so far.” Denying a previous report, he also stated that Del Vecchio and Guerra did not disagree on Google Glass and that the project will be pursued.
Cavatorta said that the group has identified new markets, especially in Southeastern Asia, where it can establish a direct distribution of its collections in the coming years. He reiterated that the group will not expand its optical retail business in Europe but will increase its sunglass retail footprint in the region by focusing on travel retail and department stores.
He added that the group has leeway to boost efficiencies and reduce costs by adjusting under-performing licenses and other businesses or terminating them. Cavatorta noted that in the past Luxottica had “tolerated” activities with a low profitability but the new management team would be more “severe” in its choices. He added that the group would not necessarily privilege home brands, which generally have a higher return, over licensed brands.
The group confirmed plans to pursue its acquisition policy and Cavatorta disclosed that the group is examining opportunities in retail and brands. According to Il Sole 24 Ore, Luxottica has halted its acquisition campaign until the appointment of the second co-CEO. Before the management overhaul, the company was studying four acquisitions including that of Maui Jim, the newspaper said. Guerra was very interested in the Hawaiian brand, which could be valued $600-700 million, the daily added. When the rumors about Maui Jim's sale to Luxottica surfaced earlier this year, officials of the company said that it was not for sale. In fact, the Italian newspaper said a few days ago that the other three potential transactions have a higher chance of being carfried out. They involve brands operating in emerging markets.
Cavatorta stressed that earnings will continue to grow at a faster pace than revenues and that the group's “rule of thumb” of operating and net profits growing twice as fast as sales will remain valid for a “number of years to come.” He also confirmed rumors that Del Vecchio wants the group to achieve a net profit margin of 10 percent. Cavatorta added that he has set a personal goal of reaching that target as soon as possible. In 2013, Luxottica posted an adjusted net income margin of 8.4 percent.
The new joint CEO also indicated that, after reducing debt, there is leeway for Luxottica to pay more generous dividends. He said that a new chief financial officer will soon be appointed and that there are many valid candidates within the company. Del Vecchio will be more active in the management of the group but will not be an executive manager, according to Cavatorta. He described Del Vecchio as a guide helping the managers with his strategic vision. It is a role that he held in the past and that he will now perform “a little more” than in the past, he added.
An independent equity research group, Morningstar, has indicated that it has no concern about the impact of the management change on Luxottica's leadership in the industry. “As the clear leader in an industry that has evolved toward oligopoly, we see neither why the industry structure would change nor why Luxottica would lose its leadership position,” it said. Morningstar added that thanks to its appeal, the group should be able to attract a capable co-CEO rapidly.