Is Hermes really impervious to LVMH advances?


By Peter Finocchiaro

Independent French fashion house Hermès has rebuffed the advances of conglomerate LVMH Moet Hennessey Louis Vuitton through its creation of a seemingly impenetrable holding company. But will it last?

The birth of the holding company represents a huge victory for Hermès as it hopes to retain independence from LVMH, whose share in the company has eclipsed 20 percent. French regulators ruled that the creation of the holding company is exempt from traditional regulatory practice which states that any party looking to take such action has to make a tender offer for ownership of the entire company.

“Right now, the way Hermès stands, it is impenetrable,” said Milton Pedraza, CEO of the Luxury Institute, New York. “But, that assumes that the holding company will be there forever, or that it stays the same.

“We don’t know whether or not an alliance between LVMH and Hermès might not be the best thing for both companies a few years from now,” he said. “Today, Hermès looks rock solid, and LVMH will benefit regardless because they still own 20 percent of a fabulous brand.

“But, given the state of the world and the volatility of the world, no one can say – not even family members of Hermès – that the situation will never change.”

LVMH is a French holding company with controlling interest in a number of the world’s leading luxury brands, including Louis Vuitton, Moët & Chandon, Hennessy, Fendi, Donna Karan, Marc Jacobs and Tag Heuer.

Founded in the early 19th century, Paris-based Hermès is known as much for its silk scarves, ties and Kelly and Birkin handbags as it is for its luxe leather saddles — the original product that shot the company to worldwide fame.

Family stake in the company, which amounts to 73 percent, is held among fifth- and sixth-generation members of the Hermès lineage.

How we got here
The drama began back in October when LVMH announced that it had furtively built up a 17.1 percent stake of Hermès through the conversion of cheaply purchased derivative instruments over the course of more than a year (see story).

Then last month, LVMH announced it had boosted its ownership of the company up past the 20 percent threshold, making LVMH CEO Bernard Arnault the biggest individual shareholder (see story).

“One thing I would tell you is that you rarely see synergies between luxury brands,” Mr. Pedraza said. “It is not common that there are economies of scale in the manufacturing and production of goods.

“The reason why LVMH bought part of Hermès is because, as a standalone, it is the standard,” he said.

“The purchase was much more about the gem that Hermès is in and of itself, and the potential it has to continue to grow and sustain itself over long periods of time profitably, in and of itself, not because of synergies.”

The Hermès family responded by setting in action the creation of a holding company, in which members of the clan would place 51 percent of all shares.

The arrangement would mandate that anyone with shares in the holding company offer those stocks to the family first if they wished to sell, rather than offering them up on the open market, effectively rendering the company impenetrable.

French financial codes dictate that owners of any publicly traded company wishing to take such actions are required to tender an offer for control of the whole company, which would have proved problematic for Hermès, as LVMH would not likely agree to sell its share in the company.

However, the AMF ruled on Wednesday to exempt Hermès from the regulation, clearing the way for the creation of the company.

Hermès’ autonomy appears to be safe as long as members of the family maintain their dedication to independence.

The fashion house is currently prospering and recorded one of its best years in 2010.

However, should fortunes fall, the family may feel compelled to sell.

Such a scenario played out when the Bancroft family relinquished its control of Dow Jones and The Wall Street Journal as the newspaper industry lagged and News Corp. offered to buy the company at significantly above market value.

Furthermore, the creation of the holding company in and of itself indicated a splintering of loyalty among members of the family.

“Circumstances can change,” Mr. Pedraza said. “If you have to create a company like that in order to lock in shareholders – if you have to build a cage – some of the shareholders must be temptable.”

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