Luxottica-Essilor Merger to Create Eye-Care Giant
We are leaving our moat ratings and individual valuations unchanged, with both stocks trading in line with our fair value estimates.
On Jan. 16, 2017, Luxottica (LUX) and Essilor (EI) announced a merger that will create a global integrated eyewear leader with approximately 15% market share. The transaction will result in a vertically integrated group, from production (Essilor--lenses, Luxottica--frames), to distribution, leveraging Luxottica’s extensive retail channels. Both businesses have economic moats: We currently award a narrow economic moat rating to Luxottica and a wide economic moat rating to Essilor, based on sizeable manufacturing scale advantages and, to a lesser degree, brand (in Luxottica’s case). With the new business enjoying even greater vertical integration and scale advantage, we see this merger as moat-accretive. For now, we're leaving our individual valuation and moat ratings unchanged for both firms. Both stocks were trading approximately in line with our fair value estimates on a stand-alone basis prior to the announcement, so neither firm's shareholders should view their shares' value as diluted because of the deal.
The merger will create a company with EUR 15 billion in revenue, EUR 3.5 billion in EBITDA, and net debt/EBITDA of 0.9 times (as per 2015 results). The combined entity will remain conservatively financed, as no additional debt will be issued concurrently with the merger. Both companies see the benefits of integration in speeding up the supply chain, developing new markets, and combining research and development efforts that would result in a more competitive product offering. There are also revenue and cost synergies to the tune of EUR 400 million-600 million over the medium term and accelerating over the long term. Revenue synergies account for roughly half of the total amount.
The companies expect the merger to close in the second half of 2017, following antitrust and other regulatory and shareholder approvals.
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Jelena Sokolova does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.