LVMH Moet Hennessy Louis Vuitton and Hermes surprised the luxury goods industry when they reached an unexpected settlement in a long-running battle on September 3. The two companies had been locked in a four-year legal “handbag war.”
LVMH, the world’s leading luxury group, agreed to relinquish most of its 23.2 percent stake in Hermes and not to acquire any shares in the company for the next five years.
LVMH began acquiring shares in Hermes in 2007 through a series of equity derivatives, which it did not have to declare. LVMH revealed in 2010 that it had accumulated a 17-percent stake in Hermes.
LVMH had sought to acquire Hermes because the company’s handbags are considered good investments, it is more resistant to downturns than other luxury brands, and its products do well in the second-hand market. Hermes’ annual income has consistently grown by more than 10 percent per year, even as other luxury goods makers have experienced declines in sales.
In 2011, most of the key members of the Hermes family, which is the fourth-wealthiest in France, decided to join a holding that controlled Hermes and bound them for 20 years, making a takeover nearly impossible.
Under the terms of the deal, LVMH agreed to redistribute its shares in Hermes to its shareholders. They will receive one Hermes share for every 21 LVMH shares. The distribution must be completed by December 20.
The possibility of LVMH taking over Hermes had boosted Hermes’ stock. Its stock had been trading at a price-to-earnings ratio of about 30 times in recent years, which was a 70-percent premium to the industry average.
Shares in Hermes fell 3.5 percent by the close of business on the day of the announcement. LVMH’s shares rose about 3 percent after the announcement. LVMH will make about 3 billion euros from the deal. Group Arnault, LVMH’s holding company, will own 8.5 percent of Hermes after the shares are distributed.
France’s stock market regulator fined LVMH in 2013 for not properly disclosing its stake in Hermes. Hermes took legal action for alleged insider trading and stock price manipulation. LVMH accused Hermes of libel. The agreement ended all legal action between the companies.
LVMH has underperformed compared to other luxury goods companies in the past year because of declining cognac sales in China and slower growth in sales at Louis Vuitton, which generate its greatest profits. LVMH has acquired over 60 brands in the past 20 years. This is the first time the company has abandoned its goal of acquiring a brand.
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