Things are getting fiesty in the Mulberry boardroom after shareholder Frasers Group launched a takeover bid to avoid “another Debenhams situation“.
Mulberry may have swiftly rejected Frasers’ £83m offer, which it said “does not recognise the company’s substantial future potential value” of the business, but it’s not over just yet, knowing Mike Ashley’s Frasers Group.
The luxury brand has the backing of majority shareholder Challice, which holds a 56.1% stake to Frasers’ 36.8%, as it gave its backing to Mulberry’s turnaround strategy, led by new CEO Andrea Baldo, and said it had “no interest in supporting the possible offer”.
But what’s the background to the bid, could Frasers turnaround Mulberry and what is likely to happen next?
Why is Frasers making a bid?
Frasers first invested in Mulberry back in February 2020. At the time it said its focus was “building stronger relationships with premium third-party brands” as a key strategic priority for the group was “the elevation of our retail proposition”.
“Frasers Group looks forward to working more closely with Mulberry for the benefit of shareholders of both companies.”
Mulberry has long been available to shop via Fraser’s Flannels brand and House of Fraser department store chain.
Although rumours swirled about Ashley’s intentions with Mulberry, Frasers ruled out making a bid for the luxury brand in late 2020.
However, things have changed in recent years following Mulberry’s poor performance. Ashley made a play for a seat on the retailer’s board last summer as he grew frustrated about the alleged “lack of transparency” around the retailer’s poor performing Asian business, however this was rejected.
However, the discontent reached fever pitch over the last week after Mulberry revealed late on Friday that it was looking to raise over £10m in cash as it swung to a loss in its last financial year.
Frasers Group, which was not made aware of the cash call until “immediately prior to its announcement”, did not appreciate being left in the dark and accused the luxury brand of “a total lack of engagement”
It said: “As a committed long-term investor in Mulberry, Frasers would have been willing to underwrite the subscription in its entirety, potentially on better terms for the company. Given this total lack of engagement, we believe the status quo to be an untenable position for Frasers and the other minority holders of Mulberry shares.”
The group said it was “exceptionally concerned” as the luxury retailer’s auditors flagged there was “material uncertainty related to going concern” last week.
The luxury fashion retailer posted a pre-tax loss of £34.1m in the year to March 30, down from £13.2m profit last year and said that sales had plunged an eye-watering 18% in the first 25 weeks of its current financial year.
Mulberry has been hit by a slowdown in the luxury market that is suffering from both a consumer downturn and the removal of tax free shopping in the UK.
GlobalData apparel analyst Alice Price says while tourists previously enjoyed buying from Mulberry when visiting the UK thanks to its strong British heritage, they are now choosing to buy from other designers in European cities such as Paris and Milan, where purchases remain tax-free.
Frasers said: “The company is facing unabating difficulties. To name a few, rising costs, macro-economic headwinds, and increased selectivity from its discretionary customer base. Frasers are exceptionally concerned by the audit opinion in the latest annual report released on Friday, 27 September 2024, which notes a “material uncertainty related to going concern”.
“As a 37% shareholder, Frasers will not accept another Debenhams situation where a perfectly viable business is run into administration.”
The company therefore put forward its £83m cash offer for the retailer.
Could Frasers turn around Mulberry?
Frasers believes that it is the “best steward for returning Mulbery to profitability” due to its “leading retail expertise and presence, and best in class distribution capability”.
Although some may baulk at the idea of the Sports Direct owner taking over a luxury brand like Mulberry, Frasers Group has grown a sizeable empire in the world of premium and luxury retail.
It has transformed its Flannels brand into a premium powerhouse through its “elevation strategy” with a focus on enhancing the customer experience, expanding physical stores, and investing in digital capabilities.
Flannels, originally founded in 1976, was fully acquired by Frasers Group in 2017 and under CEO Michael Murray it has entered new markets with shiny new stores, emphasising “new luxury” and high-end retail experiences.
It now has more than 80 stores in the UK and Ireland, with flagships in major cities like Leeds, Cardiff, Gateshead, and Liverpool, offering a wide range of luxury brands, including fashion, beauty, and lifestyle products.
In the year ending April 2023, Frasers Group’s premium lifestyle division, which includes Flannels, grew by 14.8%, reaching £1.2bn in revenue.
However, not all of its upmarket purchases have been a success.
Price points out that it placed online luxury marketplace Matches Fashion into administration in March, less than three months after buying the business.
She says: “As a pre-existing stakeholder, coupled with its superior retail expertise and best in class distribution capabilities, Frasers should have the expertise required to steer Mulberry back to profitability. However, it’s lack of previous success within the luxury market and limited international perspective pose limitations.”
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Former Drapers editor Eric Musgrave doubts Frasers is best placed to take over the fashion retailer, but admits “the various Mulberry managements haven’t done a very good job”.
He notes that Mulberry “has been having problems for years”, adding that some of the criticisms Frasers made yesterday were valid.
Frasers Group expressed several concerns regarding Mulberry when placing its bid, including: rising costs, macro-economic headwinds, and increased selectivity from its discretionary customer base.
However, Musgrave points out: “Whether Frasers could take it over and do any better, we don’t know”.
He does point out that since Frasers snapped up Savile Row tailor Gieves & Hawkes in 2022, “indications are that it is handling it well”.
Musgrave says that insiders on Savile Row are “reasonably impressed with how things have been going there”, and that Frasers has invested in a new refit at the retailer.
“Would it plan to buy Mulberry and just turn it into a Frasers Group own label, or would it continue to run it as what it should be – a half decent premium brand with a good heritage?”
Musgrave concedes that while the Sports Direct owner “is not an obvious home for Mulberry, I don’t think one can automatically say Frasers Group would mess it up”.
What next?
Under UK takeover rules, Frasers now has until 28 October to make a firm offer or walk away.
However, with Frasers only holding 36.8% of the firm, and Mulberry majority shareholder, Singaporean investment firm Challice, backing the luxury retailer, its takeover prospects seem weak.
Veteran retail analyst Nick Bubb said: “Unfortunately, Frasers has got itself trapped into another minority investor situation, as the Singaporean backers of Mulberry control over 56% of the shares and it’s not obvious why they should give into Frasers’ demands.”
Musgrave agrees that a deal is unlikely: “Personally, I suspect it [Challice] probably won’t sell it to Frasers.”
“If it wanted to sell, it could probably find other buyers for it, and it is doing a refinancing,” he adds, suggesting it probably has a partner lined up to do so.
Whilst a deal may not seem likely, Mike Ashley is a not a man who gives up lightly. Expect more twists and turns in the Mulberry saga.
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