Ray-Ban maker may finally live up to merger vision

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by Lisa Jucca via Reuters Breakingviews

EssilorLuxottica (ESLX.PA) may finally live up to its merger vision. The Paris-listed company on Friday ended the power-sharing pact underpinning the 2018 union that brought together the Italian maker of Ray-Ban sunglasses with the French purveyor of Varilux lenses. Axing duplication should enable the 63 billion euro giant to cut costs faster while wiping out a persistent discount. 

The world’s biggest eyewear player has spent three years grappling with a clumsy governance structure. Luxottica founder Leonardo Del Vecchio, the company’s largest shareholder with a 32% stake, agreed to share power with his French partners on a 16-member board. The arrangement led to high-profile spats between the two sides. The company also struggled to install a single chief executive, opting instead for an unnecessary duplication of top management roles. 

EssilorLuxottica has now fixed its governance. The company’s new board is smaller and comprises mostly independent directors. By approving Del Vecchio as chairman and his trusted aide Francesco Milleri as chief executive, shareholders have given the Italian duo an unchallenged grip. 

The clearer management structure should help unlock up to 300 million euros of annual cost savings arising from the EssilorLuxottica merger, promised by 2023. Though the figure is a modest 2% of the companies’ combined operating expenses in 2019, analysts estimate only 50 million euros has materialised so far. EssilorLuxottica could save a further 200  million euros if it completes the 7 billion euro acquisition of optical retailer GrandVision (GVNV.AS), says Morgan Stanley. 

The combination of lower costs and firmer leadership should help EssilorLuxottica narrow a persistent valuation discount. The group, which will soon control 20% of the global eyewear market, has no clear rival. Yet its stock has persistently lagged industry rivals like Japanese lens maker Hoya (7741.T) and luxury groups such as Kering (PRTP.PA). 

EssilorLuxottica shares currently trade at around 28 times forecast earnings for 2022, according to estimates compiled by Refinitiv. That’s a 21% discount to the average rating for 15 other eyewear, medical technology and consumer goods groups. Narrowing the gap could add at least 10 billion euros to EssilorLuxottica’s value 

There are risks. Milleri, who was little known in international financial circles before the merger, will have to prove he is up to the job. The company’s scale and cleaned-up governance mean he has few excuses. 

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