Questions remain over what LVMH was trying to achieve
Time to clap along with Pharrell Williams – everybody is, at last, happy. Peace has broken out in the tense and rarefied atmosphere of the French luxury goods industry. LVMH has agreed to distribute its 23 per cent stake in Hermès to its own shareholders. Hermès rids itself of an unwanted shareholder, LVMH can reflect on a profitable investment, and LVMH shareholders can decide for themselves whether they want to own equity (at 27 times forecast 2015 earnings) in the maker of clothes, scarves, handbags and saddlery.
The gain for LVMH is certainly impressive. It bought the Hermès shares (via equity swaps) in October 2010 at an average price of €106. The shares are now trading at €249, even after a 5 per cent drop on Wednesday. So LVMH will end up with a total gain of €3.4bn on the stake (some of which has already been booked in the accounts.)
But although legal action between the two related to the stake has been dropped, not everything is quite back to where it was. The agreement will vastly increase the Hermès free float from the current 7 per cent, so the company will be easier for outsiders to invest in. But the Dumas family that controls Hermès has tightened its grip since LVMH took its stake. A family member is back in charge after an eight-year gap, and the creation of a family holding company (H51) in 2011 will protect Hermès from a hostile takeover.
For LVMH, the agreement gives its shareholders a special dividend in the form of Hermès shares. But that still leaves the question of why LVMH bothered at all. Yes, it has been an outstanding financial investment. But investors do not own LVMH for its canny ability to spot undervalued shares (even shares in its own sector). They own it for its ability to make and sell luxury goods. Having made a success of this foray, the danger is that it will try to repeat the move elsewhere.