Stocks Rise as LVMH Takes Stake in Hermes

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HermesParis—Stock prices for both LVMH and Hermès rose today after the surprise announcement this weekend that LVMH spent $2.2 billion for a 17.1% stake in Hermès. LVMH shares rose 2.4% to 161.86 euros. Hermès shares rose as much as 31.55 euros, or 18%, to 207.75 euros and traded at 202.85 euros at the close of the Paris market today.

LVMH, the world’s largest luxurygoods group, said it is not planning a takeover of Hermès, nor would it seek representation on Hermès’ board. Members of the founding family of the 173-year-old company still own more than 72% of Hermès shares and the firm is a limited partnership making a takeover difficult.

Family members “are fully united around a common business vision,”  said Hermès in a statement late Sunday. “Their long-term control of Hermès 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.”

‘A Spectacular Move’

But Hermès executives said “We are very surprised.” Hermès deputy chief executive Patrick Albaladejo, in charge of strategy, revealed that the company was given no advanced notice of the increased shareholding by LVMH.

While LVMH said it fully supported Hermès’ strategy and doesn’t plan a takeover, retail analysts, nonetheless, have been speculating that there’s more than meets the eye in the weekend announcement.

“Strategically, LVMH’s move is spectacular, said Matthew Curtin, an analyst with the Wall Street Journal’s Heard on the Street. LVMH’s stake “is shrewd considering opportunities in the tightly held sector are rare. Hermès says its controlling family shareholders have no intention of selling. LVMH says it has no ambitions beyond holding a minority stake. But LVMH has put a marker down should more family members change their minds.”

Hermès shares have more than doubled since the May 1 death of CEO Jean-Louis Dumas on speculation members of the founding family may be more willing to sell. More than 200 members control the company through two pacts, due for renewal in December and next May. They represent 58.36% of Hermès shares.

LVMH would have paid an average of about 80 euros a share at the stated value for the entire stake, or about a 54% discount to the October 22 closing price of 176.20 euros, according to Bloomberg calculations.  “As a result, LVMH is already sitting on a paper profit of 1.7 billion euros,” Curtin said.

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 5% or more of a company. The AMF verifies whether regulations were respected when a stake crosses a threshold of 5%, a spokeswoman said.

A ‘Trophy’ Target for LVMH?

Hermès is one of the most admired brands in the luxurygoods 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.” She oversees about 4 billion Swiss francs ($4.1 billion), including LVMH and Hermès shares. “There’s only one Hermès.”

It’s also no secret that Bernard Arnault, LVMH’s chairman and one of France’s richest businessmen, has long coveted brand known for its Birken and Kelly bags and printed scarves. But while LVMH could scoop up more shares if family members start selling off their shares, a takeover of Hermès would test LVMH’s financial prowess.

Hermès has an inflated stock market value, about 21 billion euros, making it more than a third the size of LVMH. “Hermès has a high operating profit margin of around 27% and a more conservative culture, but an LVMH tie-up could significantly broaden its international reach,” Curtin said. “Mr. Arnault may still have a long wait. His failed attempt to buy Gucci shows success isn’t a given. But he has raised the bar for any rival suitor.”

Indeed by this afternoon, rumors spread through Paris markets that LVMH might be considering more seriously selling part or all of its 66%-owned liquor business Moet Hennessy to Diageo, British beverage group that already owns 34% of Moet Hennessy, which makes Moet & Chandon, the world’s biggest champagne maker, and Hennessy cognac.

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

“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.”