MILAN (Reuters) - An acquisition of Versace by Italian luxury group Prada would create a company with a broader base that is more resistant to business cycles, but reviving the targeted brand could take years and hit short-term profits.

Prada is seeking to expand after posting strong organic sales growth in the last nine months of 2024 despite a slowdown in demand, while Versace operates at a loss. A merger would be Italy's answer to the French conglomerates that dominate the luxury business.

"The (Versace) brand needs restructuring and has a history of mismanagement with no easy fix," said Melania Grippo, analyst at BNP Paribas, in a note on Monday.

However, acquiring such a famous brand as Versace would accelerate growth, said Mario Ortelli, managing partner at luxury advisory firm Ortelli & Co.

"Scale matters," he said, pointing out that Prada, with a market capitalisation of $22.5 billion, is a fraction of the size of French giants LVMH and Kering.

Bloomberg News reported on Sunday that Prada is moving closer to a deal after agreeing to pay nearly 1.5 billion euros ($1.6 billion) for the business founded by the late Gianni Versace in the 1970s, where his sister Donatella has been the creative head for more than two decades.

Capri Holdings ( CPRI ), which owns Versace, is working with Barclays ( JJCTF ) to explore a sale of the brand, sources have said.

WORK NEEDED

Prada, listed in Hong Kong but controlled by designer Miuccia Prada and her husband Patrizio Bertelli, has the right skills to address Versace's shortcomings in manufacturing, marketing strategy and running of directly owned shops.

It also has the leather goods skills needed to develop that part of the business, which never took off.

"Versace has not expressed all the potential it had under Capri's management. Prada has the credentials for a relaunch," Ortelli said.

Capri, previously known as Michael Kors, bought Versace more than six years ago for 1.8 billion euros.

Versace, with its bold maximalist aesthetic, would bring a new segment of customers to Prada, known for its minimalist style.

"Prada's interest in Versace probably also derives from the desire to make its business less cyclical from a fashion point of view, since it would bring on board a brand with a very different profile," UBS analyst Susy Tibaldi said in an interview.

Turning Versace around could take several years, Tibaldi said.

"There is a lot to rebuild," she said, citing, for example, Versace's widespread discounts and wide range of products, not all of which can be called luxury items. "If you can get this type of asset for an attractive price, the potential is very significant."

A sign of Versace's potential is its license portfolio, which has a retail value around $2 billion, she added.

Versace is expected to report revenues of $810 million in its fiscal 2025 ending in March, down from the previous year. It had operating losses in the last three quarters.

"We would not applaud the acquisition of Versace by Prada," BNP Paribas said. "However, in light of Prada's (recent) share price underperformance, we believe potential risks around this deal have been mostly priced in."

GENERATIONAL CHANGE

Prada ended 2023 with a net cash position of 197 million euros, after a significant outlay on real estate investments.

Analysts expect the group, which releases its financial results on Tuesday, to have over 500 million euros in net cash at the end of 2024. This would need another 1 billion euros in financing, which would be sustainable for the group, analysts said.

Prada is eyeing Versace as both companies face questions about the future.

In 2023 Prada appointed former Luxottica chief Andrea Guerra as its CEO, replacing Patrizio Bertelli and Miuccia Prada, to ease a transition to the next generation of the founding family.

Speculation is rife about changes to Versace's creative leadership, a role held for over 25 years by Donatella Versace.

At the end of 2024, fashion trade publication WWD reported that her contract was due to expire in February and that its renewal was uncertain.