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The Estée Lauder Companies has come under the spotlight. Its share price has collapsed since January after a series of profit warnings, but it’s been rising steadily in the past three weeks. It is up 18 percent since Nov. 1. LVMH has denied any interest in acquiring the company, but investors are speculating that it could buy a stake or eventually make a bid. Some insiders also think an activist investor could build a position in order to put pressure on the company to nominate a new CEO and change its strategy.

Having lost two thirds of its value in the past two years, the Estée group has become an irresistibly undervalued asset for the shrewd financier and LVMH boss Bernard Arnault. Some industry insiders believe a mega transatlantic deal could be on the cards at some point. But in the short term, what is most likely is that LVMH buys a stake first and the Lauder family publicly welcomes the move, saying it shows how promising and attractive the company’s brands are.

LVMH did the same with the Tod’s Group. In 2021, it raised its stake from 3.2 percent to 10 percent. The company’s controlling family, the Della Valle, have said that if one day they were ready to sell the company, they would sell it to Arnault.

LVMH knows that it cannot go aggressive on the Lauder family. They are perceived as royalty in the United States. If it did, the group would run the risk of U.S. consumers turning against them and starting to boycott Tiffany & Co. Arnault is an intelligent man. He knows how important it is for LVMH to be well regarded in the United States.

Several fund managers told Miss Tweed earlier this month they were buying shares in the Estée company on the expectation that LVMH could buy a stake, make an offer or that an activist investor may acquire a significant holding. There is no visible evidence of LVMH buying shares in the Estée Lauder Companies. However, several industry sources believe the group could already be buying shares under the radar – like it did in Hermès 15 years ago using equity derivatives.

Last week, Miss Tweed reported several sources close to LVMH saying it was not keen to buy the Estée company because it was still struggling to digest its $16 billion acquisition of Tiffany & Co. The French group argued that it would not have enough captains to lead the ship since the acquisition of the U.S. jeweler. depleted its talent pool. Of course, many good people at the Estée company would stay, but LVMH would need to bring in a strong executive team of at least 20 people to get going, including a CEO, a few marketing maestros and regional chiefs.

LVMH does not want investors to know that it’s actually ready to take on the U.S. beauty giant now worth $44 billion on the stock market, up from $41 billion two weeks ago. “It’s clearly a major undervalued asset for Bernard Arnault,” one senior industry source said about LVMH’s CEO and controlling shareholder. “I am sure that Arnault is on this… and money is not a problem.”

PERFECT STORM

For LVMH, it’s the perfect storm. Investors lost faith in management after the company missed expectations several times this year and in 2022. The controlling Lauder family is divided over who should lead the group, making it an ideal target for Arnault, a past master at exploiting rifts within families. That’s how he got control of many prestigious brands including Guerlain and Hennessy.

Leonard Lauder, the 90-year-old patriarch, son of Estée, officially retired from the board at the annual shareholder meeting on Nov. 17. He remains the guardian of the family spirit and a highly respected and authoritative figure who turned the Estée Lauder Companies into a global multinational with an impressive portfolio of brands including M.A.C., La Mer, Jo Malone London and Tom Ford.

Like his niece Jane Lauder, 50, the second-biggest family shareholder after him, Leonard thinks it’s time for CEO Fabrizio Freda to go after nearly 15 years, during which he has pocketed several hundreds of millions of dollars, sources close to the company have said. The Lauder family needs to find a replacement, but no descendant of Estée has been selected yet to lead the company in the 21st century. There’s also a father-and-son rivalry going on as well. Leonard’s son William, 63, who is executive chairman, stands opposed to his father’s view and wants Freda to stay for now.

At the AGM, William reiterated “to the board, our stockholders and our employees that we remain steadfast in our commitment to the long-term continuity of the Estée Lauder Companies as a family-controlled enterprise, because we see the enormous and exciting potential of this business.”

REMEMBER THE HERMÈS HANDBAG WAR

If the Lauder family were willing to sell – which they are currently not – LVMH would surely make a move, industry insiders predict. And if they don’t want to sell, Arnault may find a way to get them to change their mind. He is a fine strategist. Let’s remember how LVMH took the Hermès family by surprise, announcing in 2010 that it had built up a 17 percent stake in the French luxury brand, which it would later increase to 23 percent. That year, Jean-Louis Dumas, the man who built Hermès into a global empire and designed the strategy still implemented today, passed away. Dumas was a visionary and the man who kept the Hermès family together. His disappearance made the Dumas, Guerrand and Puech controlling families – all descendants of Emile Hermès – vulnerable, and Arnault tried to take advantage of their grief and soul-searching.

Ultimately, Arnault did not win what the media dubbed the “handbag war.” He had to let go when Hermès family members united and created a controlling structure that made it impossible for any of them to sell their shares for two decades. When LVMH tried to buy Hermès – which it always denied – many Hermès family members, including people who were in banking and other sectors, joined the maker of the prized Kelly and Birkin handbags to defend it. At the AGM of the Estée group, Gary Lauder, 61, Leonard’s youngest son, a venture capitalist who has never been involved much with the company, joined the board. He may prove useful to help the family defend itself against Arnault if need be. The Lauder family have a 35 percent stake in the company but 84 percent of voting rights. Therefore, in theory, nothing can happen without their approval.

“LVMH are certainly not going to map out their plans, they don’t want anybody to know,” a senior industry source said. There is a strong rationale behind such a deal. For LVMH, it would boost its presence in North America, where its brands Dior, Guerlain and Givenchy could be stronger. Also, LVMH has suffered from a drop in wine and spirit sales in that region. “Diversification is the name of the game and beauty is a good bet,” the industry source said.

LVMH would bring Estée its marketing might and its ability to organize hard-hitting, high-profile events and ad campaigns with celebrities and influencers that get consumers’ attention and help its brands gain market share. The two groups could mutualize their distribution networks – fundamental to success in the beauty business. Together, they would represent a strong rival to L’Oréal, particularly in North America, where the French group would be dwarfed by this newly born behemoth.

WHAT ABOUT TOM FORD?

If LVMH made a bid, it’s likely that anti-trust regulators would force LVMH to sell parts of the Estée group, which it may want to do anyway as it may not want to take on all of the Estée group’s brands. It would be interesting to see how things would pan out for Tom Ford, the Estée company’s biggest success story. It owns the Tom Ford name, but the fashion brand business has been acquired by Italy’s Zegna Group. What would happen to that relationship if LVMH took over? This would be an interesting aspect of the deal if one was to come to the table.

Also, the Tom Ford brand has a perpetual license with Italian eyewear maker Marcolin. LVMH could strike a deal with Marcolin so that it continues to manufacture Tom Ford eyewear or buy the Italian company.

Marcolin’s private equity shareholder PAI Partners would no doubt be in favor of an LVMH bid. It’s been trying to find a buyer for Marcolin for years. The time has come to move on and sell its controlling stake. Last year, PAI Partners tried to sell Marcolin to U.S. eyewear company Marchon but the deal was scuppered by the announcement that the Tom Ford brand was being put up for sale, creating uncertainty about Marcolin’s future income, as Miss Tweed reported in July 2022.

The Tom Ford license represents more than half of Marcolin’s revenue. After the Estée Lauder Companies bought Tom Ford for $2.8 billion in November last year, Marcolin bought the Tom Ford eyewear business for €250 million this year. That means they own this business now. PAI Partners declined to comment.

LVMH knows it needs to tread carefully if it wants to buy the Estée Lauder Companies. Diplomacy will be key. LVMH and the Estée Lauder Companies declined to comment for this report.