Popular Prada can afford to skimp on IPO fees

June 13, 2011

By Wei Gu
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

HONG KONG — Prada didn’t become a top fashion brand by skimping on costs. But the Italian fashion house has got a discount on its Hong Kong flotation: banks handling the $2.6 billion initial public offering will receive less than 2 percent of the proceeds. The low figure partly reflects cheaper fees in Italy, where Prada first planned to float. But it is also a demonstration of the company’s clout.

Prada’s bankers, including Goldman Sachs and CLSA, will share a base fee of just 1.2 percent, with a further incentive payment of 0.7 percent. That fee — worth $50 million at the top of the price range — is low compared to other recent Hong Kong IPOs. Luggage maker Samsonite is paying its banks up to 3.25 percent of the proceeds of its IPO. Australian startup mining company Resourcehouse, which abandoned its fourth attempt to go public in Hong Kong on June 5, was willing to pay as much as 4.3 percent. By contrast, Prada is getting a deal usually reserved for mega-IPOs such as last year’s $18 billion offering of insurer AIA, where size allows the issuer to drive a harder bargain.

Prada’s Italian origins may have played a role. The company had originally planned to float in Europe, where competition from local banks means underwriting fees for deals of a similar size are 1 percent to 2 percent. Though mainland banks have become more serious rivals in recent years, Hong Kong still lacks a strong local player.

But the low fees also underscore Prada’s appeal. Banks tend to be willing to offer concessions on deals that are likely to be successful. And despite its rich valuation and recent market turbulence, institutional investors have already placed orders for five times as many shares as Prada is selling.

Prada’s other bargaining chip is that it gives banks a leg-up on future deals. A flurry of similar IPOs is expected to hit the market as issuers tap into Asians’ love of luxury. Just as Prada’s financial results are a testimony of the power of its brand with consumers, its fees show it can afford to be demanding with its banks.

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