Oakley/Luxottica Group: A Merger of Enemies?

The Oakley, Inc. (OO) - Luxottica Group S.p.A. (LUX) merger is one of the more interesting deals to surface in quite some time. Not only are the companies direct competitors in the production and distribution of eyewear, they have a long history of legal battles and open animosity towards each other that has played out like a soap opera over the years. Thus, it was a surprise, to say the least, when this deal was announced two weeks ago.

On the surface, Oakley is primarily a manufacturing of specialty eyewear (its sunglasses have obtained iconic status internationally), with its products being distributed through third-party retailers or directly via on-line sales. Internationally, Oakley owns less than 250 retail outlets, while its products are sold at more than 11,000 retail outlets in the U.S. alone. Clearly, the company should not be considered a retailer, as much as a manufacturer and marketer of its own products.

LUX, on the other hand, is a retailer first as its acquisition of Cole National, and related FTC review, indicate. LUX owns LensCrafters, Sunglass Hut International, Pearle Vision (via Cole), Sears Optical, Target Optical, and BJ’s Optical. But it is also a major manufacturing of specialty eyewear including, but not limited to, sunglasses.

So the key aspect of this combination from a competition aspect is the sunglass market, and particularly the high-end atheltic sunglass market where Oakley has become the standard name, if not in market share, then in overall brand recognition. At this point in the research, the strong impression is that Luxottica, while competing in the broader "Sunglass" market, is not a major entity in the narrower athletic niche where Oakley's presence is extremely strong, if not approaching dominance. However, Oakley does identify LUX as a direct competitor in its annual reports in the following manner:

We believe that we are a leader in this segment of the market, although various companies, including Luxottica Group S.p.A., Marchon Eyewear, Inc. and Safilo Group S.p.A., and numerous smaller brands actively compete with us.

Likewise, LUX identifies Oakley as a primary competitor:

We believe that our principal competitors in the sunglasses market include Safilo, De Rigo S.A. and Oakley.

The distinction that the FTC (and EU as well presumably) will be in defining the sunglass market as all sunglasses or niches within the sunglass market. This includes not just the athletic products offered by Oakley, but the pricing niches within the overall segment. Luxottica boast being a major player in the low- to mid-range product niche, where Oakley's products are mostly in the higher range in terms of cost. If defined broadly, regulators might conclude something similar to the following passage in this 2005 sunglass industry overview:

The sunglass market is dominated by a handful of large corporations, many based in Italy. In this confusing lineup of players, it’s hard to keep track of who’s on first.

Unfortunately, at this stage in the research, very recent/reliable market data has not been obtained, so it is difficult to break down the broad or relevant niche markets with any degree of certainty. But again, the initial impression is that there is not much overlap in the key niche markets where Oakley has a major presence. This impression could easily change if recent data indicates otherwise.

Aside from the surprise generated from this deal, this is a somewhat complex combination from both a vertical and horizontal perspective, with the vertical aspects presenting some potential regulatory issues. There is no doubt that these companies compete in the "specialty" eyewear market, and there is no doubt that the competition between the two has resulted in past problems between the two entities. On the other hand, it is abundantly clear that verticality is not a major concern for the current DOJ and to a lesser extent the EU. The fact that the FTC cleared Cole-Luxottica unconditionally despite very clear horizontal overlaps in the retail space, should provide some insight into regulator's current perception of the eyewear/eye care industry.

The current outlook for the deal avoiding FTC scrutiny is therefore positive. Again, additional research will be necessary to confirm and confidently discount potential antitrust issues.

Disclosure: We have no positions of any kind, in any security. We are a completely neutral source of research and analysis.