Hermès: Handbag Heritage Under AssaultBy
Renaud Momméja has two vivid memories of October 2010. One is the excellent harvest at his Bordeaux estate, Château Fourcas Hosten, in the village of Listrac-Médoc. "It was an exceptional millésime," he says, over a plate of lobster and braised leeks in the château dining room. Outside the windows, rolling vineyards of merlot grapes bask in the early-spring sunshine.
Momméja's second recollection is of the moment, on Oct. 23, three days after the harvest ended, when he learned that French tycoon Bernard Arnault had laid siege to his family's company, Paris luxury house Hermès International. "Everyone in the family remembers where we were at that moment," he says as a butler pours glasses of a deep-red 2004 Fourcas Hosten Bourgeois Supérieur. In Momméja's case, he was driving to a Saturday-afternoon rugby game in Toulouse when the news came over the car radio that Arnault had taken a big stake in the company. "We were all in shock."
Momméja is one of 72 adult descendants of Emile Hermès, a Paris saddlemaker who helped transform his family's business into a crown jewel of the luxury industry. Hermès, manufacturer of sumptuous silk scarves and the iconic Birkin and Kelly handbags, is now a $3.2 billion-a-year enterprise that's listed on the Paris bourse. It remains, however, under tight control by the Hermès heirs, who have scattered across three continents to pursue careers as varied as deejaying, motorcycle sales, and investment banking. And they want nothing to do with their new minority shareholder.
Bernard Arnault is the head of LVMH Moët Hennessy Louis Vuitton and the fourth-richest man in the world. He has met, and overcome, resistance to his maneuvers before. He built LVMH into the No. 1 luxury group in the world by taking control—sometimes brutally—of more than 50 brands, including storied names such as Louis Vuitton, Givenchy, and Guerlain. Just this month he reeled in Bulgari, a 127-year-old Italian jewelry and watch company, once its family owners agreed to sell after a years-long courtship.
While the Bulgari acquisition was amicable, Arnault has a reputation for sowing discord in family businesses. He was invited into LVMH in the 1980s by Henry Racamier, an heir to the Louis Vuitton business who was feuding with another faction in the company. Arnault helped Racamier vanquish his chief rival—then promptly ousted the Vuitton heir and took over the company. "At first he was very polite," recalls Jean-Louis Masurel, who was LVMH's managing director at the time. "He'll become friends with certain members of the family, offering them positions and titles. Dividing the family against itself, that's his game."
At Hermès he has encountered implacable resistance. To hear the family tell it, he is a predator who would bleed Hermès dry—"a wolf in cashmere," according to Bertrand Puech, 75, an Emile Hermès grandson who is the current family patriarch. Surrounded by snapshots and memorabilia in his office above Hermès's flagship boutique on rue du Faubourg Saint-Honoré in Paris, Puech recalls running barefoot through the halls as a child, carrying a shoe in each hand, he says, "because Mother told us that a well-dressed child should always have shoes." Now attired impeccably in Hermès-made John Lobb oxford shoes, with a silk tie and pocket square in the house's signature orange shade, Puech grimly recalls his own Oct. 23 memory. He was taking his granddaughter to the Paris Austerlitz train station when his cellphone buzzed. Arnault was on the line. "I want you to know I have acquired some shares, and we're putting out a press release," he told Puech. The release, issued a few hours later, announced that LVMH owned 14.2 percent of Hermès and could soon raise its stake to 17 percent—which it did within three days, before raising it again to 20.2 percent a few weeks later.
Shock turned to anger as the family learned how Arnault had done it. He had started buying shares in 2001, stashing them in offshore subsidiaries and keeping the total just below 5 percent of outstanding company stock; above that level, he would have been required to disclose the holding to the French stock market regulator. Separately, Arnault had bought equity derivatives—also exempt from disclosure rules—which he swapped for shares totaling about 13 percent of the company in a series of lightning-quick transactions last fall that were detailed in subsequent filings with the stock market regulator.
Julie Guerrand, a 39-year-old Hermès great-granddaughter, learned this on the morning of Oct. 23, when she got a call at her Paris apartment from David de Rothschild, head of the Rothschild & Cie investment bank where she had worked for 12 years. It turned out he had quietly been advising Arnault on the equity-swap transactions. Guerrand resigned from the bank and joined Hermès this month as head of corporate development. That makes her one of 25 Hermès descendants who work for the company. (The current chief executive officer, Patrick Thomas, is not a family member; he took over after Jean-Louis Dumas, an Emile Hermès grandson, retired in 2006.)
Arnault, who declined to be interviewed for this article, has said he hadn't planned initially to take a major stake in Hermès and has no desire to weaken the family's control. At LVMH's annual earnings presentation in Feburary, Arnault described his investment as "friendly" and "peaceful," and offered to share his company's strategic and operational know-how with Hermès.
The family is well aware of the many precedents that exist for heavily defended heirs in similar predicaments. There was the Bancroft family, owners of Dow Jones and The Wall Street Journal, which held out against the advances of Rupert Murdoch until he bought the company out from under their feet for $5 billion. France's Taittinger family, which once owned Champagne Taittinger, Baccarat crystal, and the landmark Hotel Lutetia and Hôtel de Crillon in Paris, was worn down by repeated attacks from corporate raiders, finally selling out for $3.2 billion in 2005 to U.S. buyout fund Starwood Capital.
The keepers of Hermès are determined to be different. They see themselves as a bastion against creeping consolidation in the luxury business. Three big groups—LVMH, Paris-based PPR, and Switzerland's Richemont—have doubled their combined share of the global luxury market over the past decade. Last year they posted a total of $45 billion in sales, out of the $234 billion that Bain & Co. estimates was spent on luxury goods worldwide. Hermès was founded in 1837 as a harness-making business. Emile Hermès, foreseeing the end of the horse-and-buggy era, moved the company into luggage and accessories in the early 20th century. If Hermès were part of LVMH, the family warns, relentless pressure for profits would undermine the craftsmanship and family traditions that have defined the brand. It would never be the same.
"Our companies have nothing in common," sniffs Axel Dumas, 40, who runs Hermès's leather-goods business. A former investment banker who was brought into the company in 2002 by its then-CEO, his late uncle Jean-Louis Dumas, he is about to become chief operating officer in a reorganization that will place several younger family members in key posts. Outside his office in the Paris suburb of Pantin, workers in a glass-walled atelier fold, glue, and stitch together pieces of crocodile skin to make Birkin handbags. It's the antithesis of an assembly line: Each bag is made by a single worker who spends at least 13 hours laboring over such tasks as hand-waxing exposed leather edges with a slender paintbrush.
Like sports cars luring customers into an auto showroom, superstar handbags sit splendidly in the window of the Faubourg Saint-Honoré boutique—a Kelly in bright-red crocodile, a Birkin in demure gray calfskin. No prices are shown, but they cost at least $7,000, and well over $30,000 for those made from the most exotic skins, such as ostrich. Waiting lists for the Birkin, named after actress Jane Birkin, are as long as two years. The Kelly was named after Grace Kelly, who used it to conceal her pregnancy from paparazzi, giving the bag instant celebrity when the princess was shown carrying it in a photo on the cover of Life magazine.
Hermès delicately walks the line between understated Old World glamour and celebrity excess. Its advertising is conspicuously free of half-naked models, and the only logo on most handbags is a discreet "Hermès Paris" on the clasp. Yet there's nothing understated about Victoria Beckham, who owns about 100 Birkins in a dizzying range of colors and finishes, or the characters on Gossip Girl and Sex and the City who flaunted their Hermès bags and schemed about how to bypass the waiting list. "The Hermès brand has always been classic. You can buy a Birkin bag and it will never go out of fashion," says Manfred Abraham, strategy director for London-based branding consultancy Interbrand. "There's a longevity to the brand that not many others have."
The family's 72 percent stake in Hermès is now worth $16.2 billion. That works out to $225 million for every adult descendant, although most of the shareholding is concentrated in the hands of a few family members and in funds they have set up for their spouses and children. The family also collects dividends, including an expected $160 million this year.
That has given family members the freedom to live where they want and do what they want. One cousin, Xavier Guerrand, collects North African art and divides his time between an opulent villa in Marrakesh and an apartment overlooking the Seine. Another, Patrick Guerrand, owns a polo club in Chantilly, outside Paris. Still another, 33-year-old Charles Dumas, known to his fans as DJ Prince Charles, is a superstar disc jockey who jets around the world from his London home to play at exclusive clubs and private parties for clients like Naomi Campbell and Leonardo DiCaprio. Momméja, 49, is getting good reviews for his Bordeaux.
Not all their stories have been happy. One cousin went through a scandalous divorce from the daughter of cellist Mstislav Rostropovich. Another, now deceased, was arrested for assaulting an Air France crew member during a Paris-to-New York flight in 2008. Still, they remain fiercely protective of the company. "Hermès has to remain a family holding," Charles Dumas says. "Asking us to part with Hermès is like asking us to part with our soul."
The differences between LVMH and Hermès are evident at the doors of their headquarters, less than a mile apart on Paris's Right Bank. At LVMH's ultra-modern digs on Avenue Montaigne, an escalator whisks visitors to a light-filled atrium with screens flashing fashion-show videos. At Hermès, guests enter through a 19th century porte-cochère that doubles as a delivery entrance. Upstairs is a warren of offices, including Emile Hermès's, still furnished with fraying rugs and a Bakelite telephone. The tiled hallways are lined with workshops where men and women sit at benches, hammering and stitching custom-made luggage.
For the Hermès family, the building is steeped in childhood memories. Investment banker Guerrand helped her father scour antique shops and flea markets for old saddles, luggage, and other items now displayed in a small museum adjoining Emile Hermès's old office. As a teenager, Renaud Momméja worked part-time in the John Lobb shoe department, organizing handwritten file cards with customers' foot measurements. Eric de Seynes, a 51-year-old descendant who runs Yamaha Motors' motorcycle business in France, spent hours there with his grandfather Robert Dumas, designer of the Kelly bag. In Dumas's office just off the boutique floor, they would pore over designs for silk scarves, with his grandfather encouraging him to do his own sketches. "Grandpère initiated us all to the idea that Hermès was magic," de Seynes says, "that if we had a good idea for a product, Hermès could make it."
Hermès had fewer than 500 employees when de Seynes was a boy. Today it has more than 8,000, and sales have almost doubled in the past five years, due in part to a booming business in China. On Mar. 4 the company reported operating profits of $933 million in 2010—a 27.8 percent operating margin, compared with LVMH's 21 percent.
In 2004, Hermès's investor-relations department sent a polite letter to a Luxembourg company called Hannibal. A review of the shareholder registry had found that Hannibal owned about 0.6 percent of the outstanding stock, the letter said. Would Hannibal please make a formal declaration? Since listing on the Paris bourse in 1993, Hermès had required shareholders to declare any holding of more than 0.5 percent. Although the stock market regulator didn't require disclosure of such small amounts, Hermès liked to keep track of who owned the roughly 27 percent of shares outside the family's control. The Luxembourg company didn't reply to the letter, and Hermès never followed up.
Hannibal—the name of a Carthaginian general renowned for his tactical brilliance—belonged to Arnault. Corporate filings in Luxembourg show it was set up in 1993 and used mainly as a holding company for LVMH investments in Russia. In 2001, the records reveal, Hannibal spent $81 million to acquire Hermès shares totaling about 0.6 percent of the company. LVMH says that during 2001 it acquired additional Hermès shares, bringing its total holding to between 4.8 percent and 4.9 percent. It's unclear where those shares were held. LVMH reported last year that they were owned by a Delaware company called Altair Holding and three Panamanian companies, but records in those jurisdictions show that the companies were not created until 2006 and 2007. LVMH, while not commenting directly on the Hermès shares, says it is common for corporations to distribute holdings among subsidiaries in different countries, often because of tax considerations.
Starting in January 2008, LVMH bought swaps from three banks, totaling almost 13 percent of Hermès shares, according to regulatory filings. It agreed to settle the swaps in cash, which did not require disclosure to stock market regulators. From 2008 to mid-2010, Hermès's share price doubled. With the first batch of swaps scheduled to expire in early 2011, LVMH says it realized that settling in cash would mean the banks would be releasing millions of Hermès shares onto the market, potentially dampening the stock price and allowing an LVMH competitor to buy the shares. That is why, LVMH says, it decided to renegotiate its contracts with the banks and settle all the swaps for Hermès stock. Given the relatively low price it had paid for the swaps, "it was a fantastic opportunity," Arnault's chief legal adviser, Pierre Godé, told Bloomberg News in February.
France's stock market regulator, the Autorité des Marchés Financiers (AMF), is investigating whether those transactions breached securities laws. But AMF Chairman Jean-Pierre Jouyet has said that regardless, LVMH would not be required to divest its stake. Hermès's Bertrand Puech has called on Arnault to reduce his holding to less than 10 percent. Arnault says he doesn't plan to sell, adding that he will not be a "passive" investor.
Puech says Hermès has had no contact with LVMH since the Oct. 23 announcement, apart from a tense meeting on Oct. 25 among Arnault, Godé, Puech, and CEO Thomas. The rendezvous, held at Arnault's request, took place in a private dining room at the posh Bristol Hotel across from the Elysée Palace. It lasted only about 30 minutes. "It was frank and courteous, but it was not warm," Thomas says. When Arnault joked that his wife might jump ahead on the waiting list for a Birkin, Puech shot back: "She'll have to wait like everyone else."
On the morning of Dec. 3, about 50 Hermès descendants gathered at a conference center near the Arc de Triomphe under tight security. Only a handful had been told the location in advance; the participants had been instructed to come to a nearby law office and then were escorted to the meeting site, according to Olivier Diaz, a Paris lawyer who is advising the family. The room had been swept for listening devices, no recordings were made, and the family members were asked to leave their cellphones outside.
Within four hours, they had decided unanimously to lock 50.2 percent of the company's shares into a rigidly controlled holding structure. Under their plan—which has received preliminary AMF approval but is still under review—no shares inside the holding structure can be sold without the approval of 75 percent of family shareholders. An additional 12.6 percent of shares are to be kept outside the structure, giving family members some flexibility to sell, while the holding structure has first dibs on buying them. The result is that even if some of the next generation were to unload their shares, achieving a 75 percent majority to unlock the holding could take decades. In the interim, company bylaws give the family total control over board appointments.
"If we had done nothing, there would always have been suspicions," Momméja says. "And of course we knew Bernard Arnault had targeted other families."
There are already small fissures in the fort the family has constructed. Bertrand Puech's brother, Nicolas, who owns almost 6 percent of the company, has not placed any of his shares in the holding structure. He kept them separate to avoid potential tax liabilities, as did some Hermès family trust funds that own about 3 percent of shares, according to several people with knowledge of the situation. Nicolas Puech was among the 72 family members who signed a Jan. 7 letter to Hermès employees describing Arnault's investment as "bellicose" and saying the family was "delighted" with the holding structure. Yet in an interview published on Mar. 13 in the Paris newspaper Le Journal du Dimanche, he criticized the holding arrangement for "depriving family shareholders of their individual power" and said he was open to the idea of cooperation between Hermès and LVMH. Reached by Bloomberg Businessweek at his home in southern Spain, Nicolas Puech said he has had no contact with LVMH but declined to comment further.
Luca Solca, a London-based analyst with Bernstein Research, says Hermès could see some benefits from cooperating with LVMH, for example by negotiating jointly on real estate and advertising deals, without risking the brand's integrity. "I'm not sure I find their arguments entirely rational," Solca says. "Why did they take the company public in the first place?"
Some other families have gone willingly into the LVMH fold. "The luxury market is going to be even bigger, more competitive, and from a geographic point of view, more dispersed," says Bulgari CEO Francesco Trapani, a descendant of the Italian jewelry maker's founder, who will head LVMH's jewelry and watch division after Bulgari joins the group. "If you have the opportunity to put together luxury expertise with scale, a strong platform of finance, and global organization, it's more probable that you'll be more successful."
Vuitton, for example, has become by far the world's best-selling luxury brand under Arnault's stewardship, with sales estimated to reach $7.2 billion this year. But some say the Vuitton story highlights the risks that would face Hermès if it were absorbed by LVMH. Much like Hermès, Vuitton for many years was known for beautifully crafted luggage and handbags. Arnault brought in a young designer, Marc Jacobs, who updated the products with whimsical designs such as cherry blossoms and cartoons. As sales soared, Vuitton's manufacturing became highly automated, in factories run by managers drawn from industries such as tiremaking and cellphone manufacturing. Vuitton today is a "mass market" brand, Interbrand's Abraham says. "The craftsmanship, the personal passion, is not the same."
The family is bracing for what could be a long fight. Over coffee at a sidewalk cafe on Paris's Place des Vosges, de Seynes reaches into his jacket and pulls out a worn crocodile wallet embossed with the initials: RD. Inherited from his grandfather, the 40-year-old wallet still contains Robert Dumas's identity card and photos of a house from which he escaped from captivity by Nazi occupiers. "I always have it with me," de Seynes says. "His values are still living."