Why LVMH Really Wants to Pull Hermes into its Fold
It's hard to believe anyone wouldn't want to own a piece of Hermès, the 173-year old French company best known for fine leather goods, including one of the most coveted "it" handbags of all time -- the Birkin. So it shouldn't have been much of a surprise when that other luxury company LVMH Moët Hennessy Louis Vuitton announced it gobbled up as much as 17.1 percent of Hermès for a total of 1.45 billion euros.
Yet the move has analysts and traders wondering about the prospects of hostile takeover. Hermès stock has fluctuated wildly in the wake of the speculation, falling 13 percent to 177 euros, the biggest intraday drop since at least 1993 (when the company went public), then soaring 15 percent to historic heights yesterday.
Part of the uncertainty is due to the fact that LVMH not only made such a stealthy acquisition, but that no one knows who the shares were purchased from. Hermès' founder's descendents continue to control nearly 75 percent of the company despite the death last May of its patriarch and former chief executive officer Jean-Louis Dumas which fueled takeover rumors, too.
Many analysts view Hermès stock as overpriced. Even during the darkest days of 2008 when the company was still turning a profit and shares rose 16.7 percent over the past year, (leaving both LVMH and owners of Gucci Group PPR to eat the dust of their 44 percent + losses) some suggested the gains would not be sustainable. (They clearly underestimated the perennial desire of fashionistas to own an Hermès hand-rolled silk scarf or Kelly bag.)
Now, as the luxury market rebounds, Hermès continues to look good. Sales were up 20 percent in the first half of 2010. Luca Solca, luxury analyst at Bernstein Research in London estimated LVMH paid about 80 euros per share (think discounted enough to add value to the investment).
WWD reports Solca says the value of floated Hermès shares would automatically fall if "a very large chunk of shares hit the market" -- and the LVMH surprise buy is likely to deflate Hermès' market value now that there's "less pressure in the immediate term for an immediate takeover."
But it's very likely that LVMH helmsman Bernard Arnault is personally angling to grab a bigger portion of Hermès' pie. First, because LVMH has the resources to do it. Second, Arnault's no stranger to sparking takeover wars. He wrestled control of Vuitton and LVMH in the late 80s in a similar fashion -- turning the family of owners against each other and then launching a hostile takeover bid. He tried to do that again with Gucci in 1999 but was ultimately thwarted by "white knight" Francis Pinault of the French luxury conglomerate PPR.
LVMH currently has 60 luxury brands in its (fine leather) clutches currently. Despite the difference in fashion philosophy -â€" LVMH labels such as Fendi, Vuitton and others rely heavily on creating new "it" merchandise each season where Hermès leans on traditional best sellers â€" the acquisition would only increase LVMH's fashion quotient. Not to mention provide profit stability in case of another economic earthquake. And if Arnault can swing it soon, he'd be just in time to have Hermès fuel LVMH's expansion plans for China and India.
Image via luxurysociety.com
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