While those in the US were celebrating Martin Luther King Day on Monday this week, Essilor (Euronext: EI) and Luxottica (Italiana: LUX) announced a €50 billion merger to create an eyeglass behemoth. Readers will know that Essilor has been a favourite business of Montaka’s for some time. It is the clear global leader in eyeglass lenses, with dominant market positions in all major regions of the world.
Luxottica, for those who don’t know, is the clear global leader in eyeglass frames. Whether you wear Ray-Bans, Oakley, Arnette, Prada, DKNY, Tiffany or just about anything else, chances are your frames were designed and manufactured by Luxottica.
And, like Essilor, Luxottica is a high-quality business. Luxottica has a clean balance sheet, generates significant free cash flow and earns returns on invested capital well above the average.
The same multi-decade structural trends that are benefiting Essilor are also driving Luxottica: namely growing demand from emerging markets and aging populations in developed markets, as illustrated below.
Unlike many deals, we believe this merger truly makes strategic sense. Essilor is strong where Luxottica is weak, and vice versa. And the combination of the two companies will generate up to €600 million in additional synergies per annum. (Actually, we believe there will be additional cost-reduction opportunities that the companies will not announce until the deal closes).
On the announcement of this merger, Essilor rallied by 12%, benefiting Montaka’s investors. This stock price rally basically reflects the value of the synergies that will stem from the deal, in addition to a small discount at which Essilor was able to buy the shares of Luxottica’s largest shareholder to cement its control.
Of course, like all deals, it is not complete until it closes – which is expected in the second half of 2017. If management can get it across the line, they will have created one of the truly great global companies.
Montaka owns shares in Essilor.
Andrew Macken is a Portfolio Manager with Montgomery Global Investment Management. To learn more about Montaka, please call +612 7202 0100.
