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Week 4 Case Analysis

Prada is considering various options to raise capital to pay off over €1 billion in debt maturing in the next year and fund expansion in Asia. The options being considered are an IPO, issuing Hong Kong Depository Receipts, strategic partnerships, private equity, or "Dim Sum Bonds". An IPO may raise the most capital and increase brand awareness in Asia, but risks underperformance or overvaluation negatively impacting the brand. A strategic partnership could provide capital for debt and expansion, but may not provide enough funds. Each option has advantages and disadvantages, so Prada will need to carefully evaluate which approach best addresses its short-term debt obligations and long-term growth plans.

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Varun Abbineni
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1K views

Week 4 Case Analysis

Prada is considering various options to raise capital to pay off over €1 billion in debt maturing in the next year and fund expansion in Asia. The options being considered are an IPO, issuing Hong Kong Depository Receipts, strategic partnerships, private equity, or "Dim Sum Bonds". An IPO may raise the most capital and increase brand awareness in Asia, but risks underperformance or overvaluation negatively impacting the brand. A strategic partnership could provide capital for debt and expansion, but may not provide enough funds. Each option has advantages and disadvantages, so Prada will need to carefully evaluate which approach best addresses its short-term debt obligations and long-term growth plans.

Uploaded by

Varun Abbineni
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© © All Rights Reserved
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FINS 5512

Case Analysis
Week 4
Varun Abbineni
z5093991
Prada: To IPO or not to IPO: That is the question, again
Prada is in need of large amounts of capital in order to pay off their
existing debt, with over 1 billion of debt maturing over the next
one year, half of which is maturing in the next couple of quarters. In
addition, Prada is looking to expand its operations in the emerging
markets of Asia, needing additional capital to pursue this
opportunity. In order to gain access to this funding, Prada are
considering several options, notably IPO, issuing HKDRs (Hong Kong
Depository Receipts), Strategic Partnerships, Private Equity and
Dim Sum Bonds.
The current and short-medium term outlook for the global fashion
industry is that of continued growth, albeit at a slower rate than in
the recent past. Nevertheless, the forecast of 10-11% growth for
Asia, with the 15-20% growth in China in particular, singles out the
market as a key area of focus for the fashion industry, which
explains Prada's eagerness to expand their Asian business, whose
revenues are primarily from direct retail. This is reflected in Prada's
rapid revenue growth from retail, and flagging wholesale revenues.
Prada has to consider several factors in raising capital. First and
foremost, the debt that is maturing over the near term has to be
serviced, and Prada needs access to large scale equity financing
over the next few months in order to service the debt. Second,
Prada requires financing to pursue expansion opportunities in Asia
(notably China). Given the nature of the fashion industry, which
thrives on brand awareness, funding that enables Prada to obtain
market awareness is sought. Further, funding from the very markets
that Prada wishes to target, namely the Asian markets, is important.
This means that obtaining funding in the Asian markets, rather than
in Prada's home market (Europe) is preferred. From a medium-long
term perspective, Prada's valuation must be reasonable, as
overvaluation would cause mean reversion of the equity over the
medium term, which investors would not want. This may decrease
the likelihood of their investing in subsequent fund-raising exercises,
and Prada will be unable to gain requisite access to financing in
future.
If Prada decide to go public via IPO, it stands to gain access to
greater funding from listing on SEHK than listing on Western stock
exchanges. This is because firms tend to be valued higher in Hong

Kong. Further, listing in Hong Kong, which is proximal to Prada's


target market (Asia, primarily China) offers them increased brand
awareness in the continent, and matches another of their criteria.
However, Prada runs the risk of its stock not appreciating
adequately due to higher valuation at IPO.
If Prada chooses to obtain funding via Hong Kong Depository
Receipts, it would present certain tax benefits for Prada's investors,
but not the publicity it seeks.
Prada could also choose to go for Private Equity, in which case it
could raise a sum from PE funds or other investment houses to
service its debt in the short term, and possibly even raise additional
capital for expansion. However, this route will not fetch Prada the
most funds.
Another increasingly prominent alternative would be to issue bonds.
Given Prada's expected credit rating of A- and adequate demand to
raise 750 million in funds at LIBOR 2.25 to 2.50, it could service all
of its debt due to mature in the next two quarters, and some of its
debt due to mature over the subsequent two quarters after that.
However, this will not help pay off all of Prada's short term liabilities,
and will certainly not enable Prada to expand. Additionally, the
short-term maturity of a bulk of Dim Sum Bonds will not help
Prada as the existing debt will only be replaced by more shortmedium term debt, and Prada will have the same problem to deal
with in the subsequent few years.
A strategic partnership would be a good idea for Prada given the
benefits from a business perspective. It could partner with other
prominent fashion houses like Richemont or LVMH, which could
afford capital to cover the short term debt, as well as offer increased
potential for expansion in the Asian markets. However, as with many
of the other options, the amount of capital that Prada can raise in
this manner is limited, and will not entirely serve its purpose.
An additional avenue that Prada could pursue is to go for dual
listing, where it gets listed on multiple exchanges, in this case Hong
Kong and a prominent European exchange such as Milan. This would
allow Prada to raise funding from multiple markets. However, Hong
Kong regulations with regards to clawbacks will leave limited stock
for the other exchange, which would not present adequate benefit
to consider listing in another market. In addition, it could weaken
Prada's brand image and be counterproductive.
Given the constraints, Prada might choose to go for an IPO, which
serves both of its primary requirements. However, it has to be wary
of the resulting effect of under-performance or overvaluation, which
may end up harming the brand in the long run.

Sources:
1) Wall Street Journal, Prada's IPO Show Should Skip Milan Listing,
Espinasse, P. [Published on 7 Feb, 2011]
2) Ivey, Prada: To IPO or Not to IPO: That is the Question, Again,
Sapp, S. [Published on 9 May, 2012]

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