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The “mother” of all holding company trades is being taken away from us by the Arnault Family Group. On 25 April 2017, the Arnault Family Group announced an offer for the remaining Christian Dior shares it doesn’t own. The deal is structured as a simplified mixed offer on the Christian Dior minorities. The main features are: A primary offer of €172 cash and 0.192 Hermes shares; A secondary offer at €260 in cash; and, A secondary offer at 0.566 Hermes shares. The tenders to the secondary offers will be subject to pro-ration based on the acceptances tendered to the primary offer so that the overall proportion of €172 cash and 0.192 Hermes share per Christian Dior share is respected. The offer is expected to be filed in late May with AMF clearance expected in June 2017. The offer is expected to last 3 weeks and thus, the primary offer should be completed by July. Furthermore, Hermes shares are expected to go ex-dividend €2.25 on 8 June. Although the deal structure is uncommon and minority shareholders in France usually challenge minority buyouts (even following AMF approval), we ultimately believe the deal could complete albeit with a delay. The transaction is a simplified mixed offer and the AMF are likely to approve the offer, given it is not a squeeze-out and the price paid for Dior Couture appears fair. The appeal process of the AMF approval following a shareholder challenge now takes six months for the Court of Appeals to render its decision. During this time, the AMF systematically suspends the bidding period which provides minority shareholders a significant amount of time to ramp up its attack of the offer. We question as well if minority shareholders can challenge the sale price for Dior Couture (Mr Arnault will continue to own Dior Couture through his existing stake in LVMH). The Arnault Group have also stated they do not intend to squeeze-out minorities within the 3-month period following the close of the transaction. The Groupe Arnault plans following this period is likely to be disclosed in the Offer Documentation which will be published following AMF approval of the offer (in June). We see small optionality embedded in the deal as CDI historically trades at a discount to NAV of around c.20% against LVMH. Tender results could be poor if the market prefers to hold the Christian Dior/LVMH spread (trading today a 14% discount) and ask for a bump or await Mr Arnault’s next move. In our view, Mr Arnault has no immediate urgency to reorganise his holding structure. Given the offer will be made under the simplified procedure under AMF code, there is no minimum acceptance condition and is only subject to: (i) receipt of AMF approval, and, (ii) conclusion of the financing of the deal under satisfactory terms. Part of the transaction is the acquisition of Dior Couture by LVMH in cash for €6.5bn EV including Dior Couture’s real estate (with a 2-year vendor financing at a 1% rate). The price paid for Dior Couture is fair and slightly above analyst estimates. Dior Couture has above average gross margins compared to the sector but below sector average EBIT margins on the back of high OPEX. Therefore, if we look at EV/EBIT or any other measures which take into account profitability, we get an even higher valuation in terms of relative value and sector average. Following deal completion, Dior will be a transparent company with a c.€4.8bn cash pile (€1.7bn of net debt to which €6.5bn of Dior Couture proceeds will be added). Therefore, post-closing we believe Dior will carry out a share buyback or pay a super-dividend to their shareholders to pay back debt at the Groupe Arnault level and discount to NAV trades at c.10%. If the discount between Dior and LVMH (currently at 13.6%) widens to 20% where it has historically traded, we would exit the Dior/Hermes trade and instead enter the Dior/LVMH trade. While it remains unclear what Groupe Arnualt’s “end-game” is, aside from the sale of Dior Couture, he could do a squeeze-out in the mid-term (i.e. after the 3-month period). We believe that given Hermes current trading price, this is a smart move on the part of Mr Arnault. However, if Hermes’ share price falls between now and the close of the transaction, Mr Arnault may be forced to “bump twice” – firstly to compensate from the loss in value linked to the Hermes share price and secondly to compensate for the nil-premium he is paying for the current transaction which may not be acceptable to certain minority shareholders. We see the “small” optionality of a bump prior to the closing of the offer if the discount on CDI/MC widens to over 15%. The ability to arb the CDI/RMS spread vs the CDI/MC spread provides additional optionality. As previously mentioned, we believe there is a chance minority shareholders will appeal the AMF decision in the Paris Court of Appeal despite the limited chance of success and the delay to closing. The delay would however expand the value of opportunities available.
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