Bernard Arnault has long been known for selling high. He controls LVMH, the leader in the luxury goods world, where gross profit margins above 50 per cent are the norm. But the richest man in France has just shown a remarkable ability to buy low. LVMH announced on Saturday it had acquired a 17 per cent interest in Hermès for €1.45bn, less than half of what it would cost at the current share price. The purchase raises a series of questions: how, why, when and whether?
How did Mr Arnault manage to get such a bargain? Some details may come on Wednesday, but presumably the sellers agreed on the price before the shares almost doubled in 2010. Still, LVMH paid an average of €80 per share, and the stock has not been below that for more than a few weeks since 2006. The sellers must have had some other, non-monetary, considerations.
Indeed, perhaps Mr Arnault was able to persuade some members of the controlling family, the fourth richest in France according to Challenges magazine, that the brand’s heritage and Frenchness were safe in his conglomerate’s hands. His promise not to make a tender offer or even sit on the board of directors would provide initial comfort.
Fine for now, but when will LVMH change its intentions? There is no hurry. Hermès is debt free and growing steadily, while LVMH would find the €15bn-plus price tag for the rest of the shares a stretch, even with its market capitalisation of €55bn and debt of only €3bn. But each of the 40 or so members of the controlling family at Hermès has a personal story. Many of these stories may end with a sale of their holding.
Finally, investors will wonder whether this purchase will encourage further consolidation in the luxury goods sector. Not necessarily, since it will be hard for others, or even for Mr Arnault, to get as good a deal as this one. The sector, like the stuff it sells, is expensive. Hermès shares are going for a lofty 45 times expected 2010 earnings.
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