LVMH ends Hermes siege, to relinquish $7.5b stake
Sep 03 2014 , Paris
Following intervention by a French court, Arnault’s LVMH Moet Hennessy Louis Vuitton will distribute the 23 per cent stake to its shareholders and institutional investors, almost four years after the world’s largest luxury-goods company started building the holding without Hermes’ knowledge.
The announcement marks “the end of the siege,” Luca Solca, an analyst at Exane BNP Paribas, said via email.
Hermes has been at loggerheads with LVMH over the stake, which was amassed via equity swaps. The move rallied descendants of founder Emile Hermes to pool their shares in a holding company to protect against a full takeover and sparked legal action as well as demands that Arnault reduce the shareholding.
The distribution of the stake, due to be completed by December 20, will leave the billionaire’s family holding company Groupe Arnault with an 8.5 per cent interest, Paris-based LVMH said.
Hermes executive chairman Axel Dumas, 44, and Bernard Arnault, 65, “both express their satisfaction that relations between the two groups, representatives of France’s savoir-faire, have now been restored,” LVMH said in a statement.
Shares in LVMH rose as much as 3.9 per cent in Paris, the most in almost five months, while Hermes tumbled more than 11 per cent. The agreement ends all litigation between Hermes and the maker of Krug champagne, an LVMH spokesman said by phone. The investment was always financial and temporary, he said.
The resolution will boost the proportion of Hermes shares that are freely traded to more than 20 per cent from about 7 per cent and reduces “the speculative appeal of Hermes which goes back to being a normally traded company,” Solca said.
LVMH shareholders would book a capital gain of about 2.84 billion on the stake, based on the Kelly bag maker’s closing share price on Tuesday, according to a person familiar with the situation.
The maker of Hublot watches previously booked a 1 billion gain in 2011 tied to the unwinding of the equity swaps. Sanford C Bernstein estimates the total tax charge for LVMH distributing the shares will be 300 million to 400 million.
Hermes patriarch Bertrand Puech had repeatedly called on LVMH to cut its stake to less than 10 per cent to free shares on the open market. Arnault always maintained LVMH’s investment was peaceful and that it had no intention of assuming control.
“If one day we’re asked to provide assistance, help or advice, or just synergy, we’re prepared to do that,” Arnault said in February 2012. “But if not, we’re a minority shareholder, relatively satisfied to see the way the share price is increasing.”
With LVMH as an investor, Hermes shares surged 49 per cent before Wednesday’s trading amid speculation that Arnault planned to pursue a takeover of the entire company. Hermes is widely considered the jewel of the luxury-goods industry, as its $10,000 Birkins and $690 wool scarves help it command an operating margin of 32 per cent compared with LVMH’s 21 per cent.
Christian Dior, LVMH’s largest shareholder, will give the stock to its own investors. LVMH, Groupe Arnault and Dior have agreed to buy no more shares in Hermes for the next five years.
Solca said he expects Hermes’s trading multiple to reduce, “although more free float could also mean more shareholder interest down the road.”
Hermes shares trade at 30 times this year’s estimated earnings, according to data compiled by Bloomberg. They were down 4.4 per cent at € 251.15 as of 14.51 pm. LVMH stock trades on a forward multiple of 20 times, the data shows.
The move is “the divorce which makes everyone happy, except Hermes shareholders” in the short term, said Mario Ortelli, an analyst at Sanford C.