LVMH in a ‘Waiting Game’ for Hermes, Analysts Say

LVMH Moet Hennessy Louis Vuitton CEO Bernard Arnault
Chief Executive Officer Bernard Arnault, seen here, has built LVMH into the world’s largest luxury-goods company by snapping up brands from Donna Karan International Inc. to Glenmorangie Plc. Photographer: Antoine Antoniol/Bloomberg

LVMH Moet Hennessy Louis Vuitton SA said it’s not seeking a takeover of Hermes International SCA after agreeing to buy a 17.1 percent stake for 1.45 billion euros ($2 billion). Analysts aren’t convinced.

LVMH said Oct. 23 it doesn’t intend to launch a tender offer, take control or seek board representation at the maker of Birkin bags after announcing it owns 14.2 percent of Paris-based Hermes, with the option to increase the stake to 17.1 percent. LVMH didn’t say who sold the holding in Hermes, whose stock is mainly held by members of the founding family.

“LVMH is playing a waiting game,” said Luca Solca, an analyst at Sanford C. Bernstein in London. LVMH, the maker of Fendi handbags and Hublot watches, “is putting itself in pole position for an outright acquisition as the conditions appear.”

Chief Executive Officer Bernard Arnault, 61, has built LVMH into the world’s largest luxury-goods company by snapping up brands from Donna Karan International Inc. to Glenmorangie Plc. He bought a 5 percent stake in Gucci Group in 1999, saying LVMH didn’t intend to make a full bid, then increased the holding to 34 percent within a month. Arnault, ranked seventh on the Forbes magazine list of the world’s richest people, eventually lost a takeover battle for Gucci to French rival PPR SA.

Family Attachment

Hermes shares have doubled since the May 1 death of former Chief Executive Officer Jean-Louis Dumas on speculation members of the founding family may be more willing to sell. His death hasn’t changed the family’s attachment to the 173-year-old company, Hermes said then.

“Unsolicited” movements in Hermes’s capital have led the family to “confirm its absolute unity and unanimous wish” to retain control of the company in the long term, Hermes said today in a statement.

About 73 percent of Hermes is held by the family, Patrick Albaladejo, Hermes vice president of strategic development and image, said today in a phone interview.

LVMH would have paid an average of about 80 euros a share at the stated value for the entire stake, or about a 54 percent discount to the Oct. 22 closing price of 176.20 euros, according to Bloomberg calculations.

Hermes shares last traded around 80 euros in March 2009, which “is, in our view, the point from which this position might have been built over time,” Thomas Chauvet, an analyst at Citigroup in London, said in a note. LVMH shares rose 2.70 euros, or 2.4 percent, to 116 euros today.

Admired Brand

Hermes is one of the most admired brands in the luxury goods industry, according to Scilla Huang Sun, head of equities at Swiss & Global Asset Management in Zurich. The bag maker commands high prices, high margins and has a strong following among consumers, she said.

“It’s the trophy,” Huang Sun said in a phone interview. She oversees about 4 billion Swiss francs ($4.1 billion), including LVMH and Hermes shares. “There’s only one Hermes.”

Hermes shares climbed 26.65 euros, or 15 percent, to 202.85 euros in Paris trading. That values the company at 21.4 billion euros. Some traders who held short positions on the shares closed their bet today because of uncertainty around the stock, causing the shares to rise, according to Stephane Ekolo, an equity sales trader at Newedge Group in London.

Family members “are fully united around a common business vision,” the company said in a statement late yesterday. “Their long-term control of Hermes International is guaranteed by its financial status as limited partnership by shares and the family shareholders have confirmed that they are not contemplating any significant selling of shares.”

Market Rules

Under French stock market regulation, if an entity states that it has no intention of filing a bid, it will be banned from doing so for six months “unless there are material changes in the environment, the circumstances or the ownership of the entities concerned.”

French law requires shareholders to say when they own five percent or more of a company. The stock market regulator, or AMF, verifies whether regulations were respected when a stake crosses a threshold of five percent, a spokeswoman said.

LVMH said today it met French regulatory rules regarding the acquisition and will file the appropriate notifications within the timeframe stipulated by the AMF.

‘Grand Palaces’

“It smells like something that has been decided in the grand palaces and establishments in France,” Solca said. “You don’t just end up buying such a big share at such as big discount by chance.”

A spokesman for LVMH declined to comment on the seller of the stake. No one from the Hermes founding family sold a block of shares, Albaladejo said.

Based on Friday’s closing price, the remaining 82.9 percent equity in Hermes had a market value of 18.5 billion euros, according to Barclays Capital. Assuming a 20 percent premium and the current 1.45 billion euro stake, LVMH would have to pay a total cost of 19.6 billion euros to acquire Hermes outright, Barclays analysts including Vicky Lee wrote today in a note.

LVMH could raise funds by selling its 66 percent holding in its drinks venture to partner Diageo Plc, according to Matthew Jordan, an analyst at Matrix in London. Selling that stake could raise more than 10 billion pounds ($15.7 billion), Jordan estimated.

LVMH’s net debt was 2.57 billion euros, as of June 30. After buying the stake, LVMH’s 2010 estimated net debt will be 2.7 billion euros, or 0.5 times earnings before interest, tax, depreciation and amortization, according to Chauvet.

If LVMH does agree to buy Hermes, “we believe that a large portion of this value could be raised as debt and therefore that the group would not necessarily need to sell a business such as Moet Hennessy to acquire Hermes - especially if the deal took some years to materialize,” Lee wrote.

Corporate Structure

Dumas led Paris-based Hermes from 1978 until his retirement in 2006, when he was succeeded as sole CEO by Patrick Thomas, the first non-family member to run the company. Thomas, 63, has said there would be no sale of a majority stake while the fifth and sixth generations of the family were in control.

Under Thomas, Hermes’s profit margins have shrunk to 15.1 percent last year from 17.3 percent in 2005. LVMH’s profit margins remain about 10.3 percent.

Hermes is an SCA, or Societe en Commandite par Actions, which in France is used by family-owned businesses allowing members to keep control of the corporate affairs even when they become minority shareholders. The SCA means LVMH cannot take operational control of the company without the approval of the fifth generation of the family. They still control the majority of voting rights in partner company Emile Hermes SARL, which represents the family shareholders, according to according to HSBC analyst Erwan Rambourg.

Sixth Generation

Only a group of shareholders owning at least two-thirds of total Emile Hermes shares have the right to appoint the chairman of Hermes International, Rambourg said.

LVMH is positioning itself for when the sixth generation will have gained control through transmission of shares, Rambourg wrote. “While the fifth generation always said it wanted Hermes to remain independent, the sixth generation may think differently,” he said.

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