Today—unexpectedly—LVMH and Hermès announced a conciliatory agreement to end their fight over the shares LVMH took in Hermès.
Under the deal, LVMH, the world’s No. 1 luxury group, controlled by billionaire Bernard Arnault—agreed to relinquish most of its 23.2% stake in Hermès and not to acquire any shares in its smaller rival for the next five years.
That basically put an end to any aspirations that LVMH had to mount a full takeover of Hermès. Such a prospect has boosted Hermès’s stock, which has been trading at a price-to-earnings ratios of about 30 times in recent years, a 70% premium to the industry average.
Shares in Hermès fell nearly 10% to 236.5 euros in early trading on Wednesday, wiping out 2.8 billion euros ($3.7 billion) off its market value—“equal to around 350,000 Birkin handbags based on an average price of 8,000 euros,” noted Bloomberg News.
The deal, under which LVMH agreed to redistribute its stake in Hermès to its shareholders, ends four years of legal warfare between the luxury stalwarts, dubbed the “handbag war” by the French press.
In 2010, LVMH revealed it had built up a 17% stake in its rival through a series of equity derivatives instead of straightforward share purchases, which prevented it from having to declaring them.
Hermès, which is still still controlled by its founding Hermès family, “vehemently protested at having its arch-rival as its biggest external shareholder.”
Last year, AMF, the French stock market regulator, fined LVMH for failing to properly disclose the stakebuilding and Hermès launched legal action against LVMH on allegations of insider trading and stock price manipulation.
LVMH replied with its own legal proceedings, charging Hermès with libel.
The agreement signed on Tuesday night ended all legal proceedings between the two groups, they said in a joint statement issued today.
“This clears up the situation and it is one of the few divorces in which both the partners are winners,” said Mario Ortelli, luxury goods analyst at Bernstein.
JP Morgan Cazenove said in a note: “LVMH has found an elegant way out of what was a deadlock.”
The deal is also notable given the fact that Arnault, who has gobbled up more than 60 brands including Bulgari in the last 20 years, failed at acquiring what would have been his biggest prize of all, Hermès.