Luxottica's $53 Billion Deal Looks a Little Cracked

When Luxottica Group Spa and Essilor International SA announced a 45 billion euro ($53 billion) merger in January, executives seemed relaxed about antitrust risks. While the two companies are leaders in their respective fields, their eyewear activities are largely complementary. Essilor makes ophthalmic lenses; Luxottica sells frames and sunglasses, including Ray-Ban, Oakley and Persol.

Yet last month the European Commission announced an in-depth review of the Franco-Italian deal, citing competition concerns. U.S. regulators are investigating too. So is there really nothing to look at here?

Combining Luxottica -- chaired by billionaire founder Leonardo Del Vecchio -- and Essilor would create a leviathan with 16 billion euros of sales and enormous power over every stage of producing and selling spectacles and sunglasses. Doubtless that’s good for investors: The deal is meant to generate up to 600 million euros of yearly synergies, in part through cross-selling. That implies billions of euros of value creation.

But rival lens suppliers and optometrists should be worried, especially in North America, which will account for half the merged entity's sales.

True, the optical market is fragmented. Yet Luxottica is by far the biggest beast in eyewear and optical retail. It's accumulated a cornucopia of brands and about 9,000 stores. Even comedian John Oliver has noticed this. Adding Essilor, which estimates that a billion people wear its lenses, would just make it more mighty.

Buying a pair of spectacles can be slow, so there may be something to be said for a company that handles the whole process quickly. The merger might also free funds for innovation in things like smart glasses.

Such consumer benefits are why antitrust authorities often let firms buy suppliers or distributors (so-called vertical mergers). Cost savings should lower customer prices because the company doesn't have to pay the supplier's markup any more.

That's the theory, but don't count on those Prada shades getting much cheaper. Luxottica's talent is getting us to pay more for eyewear, not less. Since it bought Ray-Ban almost two decades ago, the average selling price has soared. Eyewear is now a luxury business, so you'd have to wonder whether the price of prescription spectacles or sunglasses would end up closer to input costs after a merger. Luxottica's gross margin is 65 percent, according to Bloomberg data.

A bigger worry is EssilorLuxottica shutting out competitors -- "foreclosure" in antitrust parlance -- leaving customers with less choice. If it bundles together frames and lenses for sale in its Lenscrafters stores, for example, other lens manufacturers would lose sales. Essilor supplies only about 30 percent of Luxottica’s lenses currently, says Credit Suisse. Opticians might feel pressured to sell both companies' products.

Building on Luxottica's huge U.S. retail business and Essilor's e-commerce sites might also end up cutting out independent stores.

Like Luxottica, which stocks rival brands in its Sunglass Hut chain, Essilor promises to remain open to external businesses. Yet a backlash has started. Some optical stores have switched from Essilor to rival lens suppliers because of fears about the deal.

Curiously, the merger also halts nascent competition between the two companies. Essilor had started pushing its own sunglasses and online sales, while Luxottica was adding lens manufacturing. Analysts thought the two were on “collision course” for a price war that would have hurt margins and helped consumers.

Antitrust officials seem to be awake here. Brussels worries about less competition in ophthalmic lenses and will rule by February. The two companies have lost a combined 7.7 billion euros of market value since May, as they await a verdict.

Blurred Vision

Investors have begun to worry the $53 billion eyewear deal might require antitrust remedies

Source: Bloomberg

Jennifer Rie, an antitrust analyst at Bloomberg Intelligence, expects demands for concessions, maybe including commitments to protect rivals and possible asset sales. Still, Essilor and Luxottica have considerable clout as separate companies. It's hard to see why they shouldn't stay that way.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Chris Bryant in Berlin at cbryant32@bloomberg.net
Elaine He in London at ehe36@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net

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