LVMH says to buy stake in Hermes for $2 billion

By Leila Abboud

PARIS (BestGrowthStock) – French luxury goods group LVMH (LVMH.PA: ) said on Saturday it was buying a minority stake worth 1.45 billion euros ($2 billion) in family-controlled handbag maker Hermes (HRMS.PA: ) but would not seek to take over the group or influence its strategy.

The move will see LVMH — which owns champagne brand Moet, Hennessy spirits and leather goods brand Louis Vuitton — eventually hold a 17.1 percent stake in Hermes, which is known for its high-end leather handbags and silk scarves.

“The objective of LVMH is to be a long-term shareholder of Hermes 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,” LVMH said in a statement on Saturday.

LVMH said it had bought 15,016,000 shares of Hermes, or a 14.2 percent stake. Once it converts certain derivative instruments of Hermes shares, LVMH said it would hold a total of 18,017,246 shares, or a 17.1 percent stake.

Hermes could not be reached for comment; the group’s spokeswomen did not return calls and emails on Saturday.

The surprising move is likely to trigger questions over the intentions of LVMH’s CEO Bernard Arnault. The French businessman took control over LVMH in 1990 after three years of internal power struggle and has often expanded its reach through acquisitions of iconic brands.

Hermes, which has held up better than peers in the economic downturn, has long been the subject of market speculation over whether some family members would sell shares, altering the group’s capital structure or even making it a takeover target.

Management have reiterated the founding family’s devotion to Hermes, in which family members own a 70 percent stake as of the last available public data.

It was not immediately clear how LVMH had built up such a large stake in Hermes, or whether it had bought shares on the open market or from family members.

Based on the information given in its statement on Saturday, LVMH seems to have acquired the 17.1 percent stake for an average share price of 80.50 euros per share.

That is significantly lower than the recent price range for Hermes shares, which have traded above 100 euros per share for most of 2010, and could mean that LVMH bought some of its shares much earlier or via negotiated options contracts with family members or other shareholders.

Hermes shares have risen 88 percent since the beginning of the year to close at 176.20 euros per share on Friday.

It also means that Arnault has already seen a significant upside to his investment in Hermes. Based on today’s valuations, the stake would be worth almost 3.17 billion euros, giving LVMH an implied profit of 1.7 billion euros if it were to sell its Hermes shares today.

REASSURANCES

In its statement on Saturday, LVMH seemed to seek to reassure Hermes and investors that it would not agitate for change at the company.

“LVMH fully supports the strategy implemented by the founding family and the management team… LVMH has no intention of launching a tender offer, taking control of Hermes, nor seeking board representation,” LVMH added in the statement.

Further protecting Hermes is its status as a limited partnership, or “societe en commandite,” a corporate structure that concentrates power in the hands of a ruling committee controlled by the family.

For example, the bylaws allow Hermes to issue new shares to existing shareholders in case of a hostile bid, and also give shareholders who have owned shares for more than four years a double vote.

The “commandite” structure is used by several family-founded groups in France like media conglomerate Lagardere (LAGA.PA: ) and tire maker Michelin (MICP.PA: ) to protect them from takeover.

Hermes is one of the few luxury companies that has continued to grow throughout the consumer spending slump, and has also been one of the top beneficiaries of an upturn in demand as the economy recovers.

LVMH, the world’s biggest luxury group, also sounded an upbeat note in its third quarter results about the economic recovery boosting consumer demand.

(Additional reporting by Astrid Wendlandt and Pascale Denis; editing by Patrick Graham)

LVMH says to buy stake in Hermes for $2 billion