“PRADA: TO IPO OR NOT TO IPO: THAT IS THE QUESTION, AGAIN” case analysis Brief summary of the case with the emphasis on managerial problems that Prada faces. Prada currently requires a significant amount of capital both to re-finance debt that is maturing in the next six to twelve months and to finance its intended growth into the Asian (especially Chinese) markets. Since financial markets are aware of Prada’s pressing need to raise capital, it is important for the board of directors to develop a credible strategy for raising the necessary capital of at least €1 billion. Although the press has been suggesting that Prada will do an initial public offering, the company has tried this several times in the past with no success, mainly because of bad timing (9/11, the SARS outbreak, and the ongoing global financial crisis and European sovereign debt crisis).
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The board has approached Guido Santini of the investment bank Grupo Capo Milano to come up with a number of credible alternatives and a strategy for raising the needed capital. 1. What is the current and future outlook for the luxury goods segment over the next couple of years? How should Prada position itself to prosper in this market? Luxury goods segment proved to be resilient to the economic crises and had consistently grown from 1994 till 2010.The luxury industry grew approximately by 2% per year until 2007, and by 1% per year from 2007 to 2010. Beginning from 2010, the global luxury goods market started a new growth phase driven by emerging markets.
This was a significant change as growth was usually driven by the developed markets, especially the US. Prada needs to support a global portfolio of leading luxury brand. Following the series of acquisitions and consistent with its attempt to become one of the top global brands Prada consistently worked on expanding its global footprint by opening and running its own stores around the world. 2. What should be Prada’s priorities in determining the best way to raise capital now?
What are Prada’s priorities in evaluating different ways of raising the funds it requires? How do these relate to Prada’s strategy? I choose IPO over Debt and Strategic partnership. Compare to issuing debt, an IPO will not add any more burden to the company’s balance sheet, which for Prada, was already showed a sign of insolvency and over leveraged. Another issue is that no firms in this industry have ever raised money in US bond market. Although “dim sum bond” – a Chinese Yuan denominated bonds issued in Hong Kong could be the best alternative to this situation, however, the short life and the exchange risk it involved are its most disadvantages. How about sale some portion of the firm to the private equity firms to raise capital? For this deal, it seems that they will not only offer a sizeable premium to the family, but also to offer some important positions on the board too.
But, compare to IPO, it will not increase Prada’s publicity through this method. And also, an IPO in Hong Kong will give the company more opportunity to expand their Asia market, especially in China and Japan. Choosing a Strategic Partnership would be just like giving that huge potential profit away. 3. What are the different sources of capital that Prada should consider? Should there be a preference for debt versus equity? Should there be a preference for raising capital in one country relative to another? Should there be a preference regarding the types of investors? How would these influence the attractiveness of the different available sources of capital for Prada? Equity IPO in HK
1.higher valuation than listed in Europe
2. aim to the Asia market
1.HK market has lower liquidity (page 7. Sect. 2)
3.potential tax problem
1. listed in Milan but also can be bought and sold by investors in HK. 2.help future negotiation in China
3. may have lower valuation than IPO in HK
4. higher cost than IPO
1.current price for PE transaction is attractive
2.higher premium 1. higher cost than other alternatives
3. may cause partially loss of control of the corporation
Debt Traditional corporate bond
1. easily priced 2
2. further potential financial problem
3. higher leverage ratio
4. How would you recommend the board of directors proceed?
One of the best solutions for Prada to solve this problem is to raise capital in the stock market, which we could refer as IPO. Given the current market conditions, listing in Hong Kong might appears to be the best choice after all.