May 1 (Bloomberg) -- Bernard Arnault would probably want more for his wine collection than Diageo Plc would ever pay.

Watchers of France’s richest man question what’s behind U.K. press reports saying Arnault would sell French icons like the 16th century Chateau D’Yquem vineyard to British owners, and whether the luxury-goods tycoon is signaling he’s ready to raise billions of euros for his first big takeover since the 1990s.

Reports surfaced last week saying Diageo was preparing a $7 billion stock sale to fund a bid for Moet Hennessy, an arm of Arnault’s LVMH Moet Hennessy Louis Vuitton SA. Besides prompting an immediate denial from LVMH, the reports perplexed Diageo analysts, who say the distiller of Smirnoff vodka wants to get full control of the French company’s champagne brands, yet is too disciplined to pay Arnault the $16 billion it may take.

“This could be Arnault’s way of sending a message both to the financial markets and the leading luxury families that he’s back in the market for M&A, and on a significant scale,” said Armando Branchini, vice-president of Intercorporate, a Milan- based consulting firm specialized in luxury goods.

Those luxury-goods families make goods from Rolex watches to Gucci loafers and Hermes scarves, all potential targets cited by analysts including Branchini and ICAP Plc’s Andy Smith. Others, like HSBC’s Antoine Belge, say those assets won’t go on sale, and thus a Moet deal makes no sense.

On April 22, the Daily Telegraph said Diageo asked Goldman Sachs Group Inc. to start preparing a 12 billion-euro bid for LVMH’s two-thirds stake in Moet Hennessy. Diageo owns the rest, and the companies share offices in Paris and other cities.

Potential Targets

A Diageo spokesman wouldn’t comment on whether the company was in talks with LVMH, and a spokeswoman for Gucci owner PPR SA declined to comment on whether it was in any takeover talks. LVMH didn’t immediately reply to a request for comment.

A decade ago, Arnault fought the Pinault family’s PPR for control of Gucci and lost. Today, the Italian-based label may be worth 9 billion euros, according to Sanford C. Bernstein & Co.’s Luca Solca, and has a profit margin of about 28 percent, near Moet Hennessy’s approximate 30 percent.

The Financial Times said in January that Arnault and Francois Pinault met to settle their decade-long feud after French President Nicolas Sarkozy intervened. The FT’s Alphaville blog has also reported speculation the Pinaults are considering asset sales to lower debt at their family holding company.

It’s still “science fiction” to think Pinault would sell Gucci to his old rival, Solca said.

Rolex Group is another possible target, analysts say. Patrick Heiniger, a member of the founding family, unexpectedly left the helm of the watchmaker in December, citing personal reasons. The same day, Rolex denied a report in L’Agefi saying it may have lost $900 million in Bernard Madoff’s fraud.

Hermes, Richemont

Virginie Chevailler, a spokeswoman for Rolex, didn’t immediately return an e-mail seeking comment.

Hermes International SCA never discounts its Kelly bags, has a steady client base among the world’s richest shoppers, and has a market value of 10.7 billion euros. Its CEO has repeatedly denied the family owners would sell. Italy’s Giorgio Armani has said the same about his fashion business.

Other than those companies and privately held Chanel SA, no targets appear big enough to require the sale of Moet Hennessy, unless Arnault pursues a merger with the Rupert family’s Cie. Financiere Richemont SA, the maker of Cartier jewelry, or the Hayek family’s Swatch Group AG, which makes Breguet watches.

To be sure, the champagne business is not the cash cow it once was as the recession discourages drinkers from spending. Moet Hennessy posted a 16 percent year-on-year sales drop last month, its worst performance ever. Still, the unit has profit margins around 30 percent, analysts estimate.

Booze Bids

Arnault would be loath to sell at “such a low point in the cycle” unless he was maneuvering to buy a rival such as Gucci or Hermes, said ICAP Plc analyst Andy Smith, head of consumer equity research in London.

Bid speculation is swirling in the spirits industry too, especially with Diageo, which has stopped buying back stock and tripled its cash pile to 2.1 billion pounds ($3.1 billion) in 2008. The Guinness brewer hasn’t made an acquisition worth more than $1 billion since it teamed up with Pernod Ricard SA to buy and split up Seagram Co.’s drink assets for $8 billion in 2000.

Diageo has walked away from what it considered overpriced deals, including last year’s auction for Absolut. Pernod, its closest rival, won the auction for the Swedish vodka with a 5.3 billion-euro bid.

‘Astronomical Volte-Face’

John Guy, an analyst at MF Global Securities, says a 12 billion-euro Moet bid from Diageo implies a price-earnings ratio of about 40, making it twice as expensive as Absolut’s sale.

Pernod had trouble digesting that deal, resorting to a rights offer this year after its credit rating was cut to junk. Diageo chief Paul Walsh is unlikely to lead his company down the same road, said Rob Mann, an analyst at Collins Stewart.

“Paying an astronomical amount” for Moet Hennessy would be a “major volte-face” for Diageo, Mann said. “It’s very unlikely. There’s nothing wrong with a legacy of financial prudence. Once-in-a lifetime M&A is rarely once-in-a-lifetime, it’s nearly always too expensive and Diageo knows that.”

The Scotsman reported on April 26 that the Moet sale reports could be a “smokescreen” designed by Diageo, helping the U.K. company flush out interest from other merger partners. HSBC’s Antoine Belge says it’s more likely that Diageo would sell its minority Moet stake to LVMH, raising cash to fund other deals, rather than buy out Arnault’s majority.

“The structure MH and Diageo have in place will not work in 10 years,” said Gerard Rijk, an analyst at ING Wholesale Banking, because the joint venture will be too small to have scale as other drinks companies get bigger through takeovers.

Diageo has “strong synergies” with Dutch brewer Heineken NV, and could approach Jack Daniel’s maker Brown-Forman Corp. or Fortune Brands Inc., the maker of Jim Beam, said ICAP’s Smith.

“If Diageo want to play hardball with LVMH, they could try and pursue one of those brands,” Smith said. “This isn’t the only deal that makes sense for them, and LVMH will need to be aware that Diageo could move on.”

To contact the reporter on this story: Andrew Cleary in London at acleary7@bloomberg.net; Sara Gay Forden in Milan at sforden@bloomberg.net.

Last Updated: April 30, 2009 19:01 EDT