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LVMH builds up a strategic stake in Hermès

LVMH builds up a strategic stake in Hermès

Monday, 08 November 2010
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Christophe Roulet
Editor-in-chief, HH Journal

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4 min read

Year after year, LVMH has patiently acquired shares and derivatives in Hermès and now holds 17% of its capital and 10% of voting rights. While the luxury giant denies any takeover plans, it is now Hermès’ biggest single shareholder.

While some of the furore has died down, the announcement still dropped a bombshell in the financial community. When at end October LVMH announced it owned a 17% stake in Hermès, it set the powder keg alight. The Hermès share price rocketed 15% in one day to reach over €200. Correction came in the following days. Even so, with a share price of between €150 and €160 and market capitalization of some €16 billion, the company’s shares have risen by more than 60% since January while the CAC 40 index turned negative. Shares are trading at more than 50 times expected earnings 2009 versus an average of 21 for the luxury industry and ten times for other sectors.

Luxury bosses have been shouting to the world for some time now that storm clouds have lifted on their business. “The crisis is over for luxury,” the CEO of Hugo Boss recently proclaimed, an opinion confirmed by Lanvin and Dior. Yet it’s not so very long ago that analysts were voicing a different view. They were predicting a less than rosy year end, pointing to a negative base effect. It seems, however, there has been a spectacular rebound if these companies’ results are anything to go by. Sales at LVMH leapt 23.6% in the third quarter 2010 and its market capitalization is setting one record after another, climbing to €55 billion at end October. In comparison, PSA Peugeot-Citroën, whose turnover is two and a half times more, “weighs” nine times less on the financial markets. The situation at Hermès is the same, with sales up 22.8% for the first six months of the year and profits soaring 55%.

Croissance du capital d'Hermès sur une année
Croissance du capital d'Hermès sur une année
Six months of speculation

LVMH’s intentions regarding Hermès remain to be seen. The leathergoods and fashion house is one of the jewels in France’s luxury crown and 72% of the company is still controlled by some sixty descendants of the founder, Thierry Hermès. When Hermès’ charismatic former chief executive Jean-Louis Dumas passed away in May, speculation was already rife as to the future of the group and its capital; the industry’s giants have never hidden their intention to also grow through acquisition. LVMH was the one name that kept on coming back. Financially speaking, LVMH has made a smart move. Having bought shares over a number of years at an average price of €80 each, the 17% stake in Hermès will have cost it roughly as much as the earnings it could make, were it to sell its shares within the hour.

LVMH has described its intentins as friendly, declaring that “the objective of LVMH is to be a long-term shareholder of Hermès and to contribute to the preservation of the family and French attributes which are at the heart of the global success of this iconic brand.” Hermès responded to this “unsolicited” move on its capital by reasserting that it was “fully united” and intended to maintain long-term control of the 170-year-old firm. The fact remains that LVMH’s announcement was unexpected to say the least, particularly as the regulatory process in France requires that any acquisition of more than 5% of the capital of a listed company must be declared to the stock market regulator. LVMH found a way round the rules, which has infuriated British and American investors who are demanding tougher controls. Either way, LVMH is currently the biggest single shareholder in Hermès and makes no secret of its desire to add to its stake, “depending on the circumstances and the market situation.” Now in the hands of the fifth generation of the founding family, Hermès is putting up a united front. Will the sixth generation feel the same?

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