Luxury: Object of desire
We’ll send you a myFT Daily Digest email rounding up the latest European companies news every morning.
That was soon after Mr Arnault’s tenacious “handbag war” for control of Gucci, the Italian leather goods maker, ended in rare defeat at the hands of arch-rival François Pinault’s PPR group (now known as Kering) more than a decade ago.
Now Mr Arnault is involved in a second handbag war – this time for Hermès – regarded as the crème de la crème of luxury goods companies for the quality and craftsmanship of its bags and silk scarves and ties.
The hand-stitched leather gloves have come off in a hostile duel between the 176-year old Hermès and 26-year old LVMH, involving not only one of the world’s richest, most controversial and private men but also the biggest shake-up in a decade in France’s luxury goods industry – the world’s largest.
The story began one Saturday morning in October 2010 when Patrick Thomas, Hermès chief executive, was riding his bike in the Auvergne countryside. His mobile phone rang. It was Mr Arnault, telling him that LVMH had acquired 17 per cent of Hermès in a “friendly” stock market operation. The news stupefied its controlling family, which holds 72 per cent.
The Hermès family called LVMH’s audacious swoop on almost two-thirds of its free float through the stealthy use of derivatives an “attack”. They also regarded it as an unacceptable way of doing business.
Mr Arnault has been no stranger to controversy over the three decades in which he has shaken up French business practice and forged a $29bn fortune, the second-largest in the country and 10th-biggest in the world.
But last week France’s stock market regulator slapped an €8m fine on LVMH for the “seriousness of the successive breaches of public disclosure requirements, which consisted in concealing each stage of LVMH’s stakebuilding in Hermès”. It lambasted LVMH’s “circumvention of the rules intended to ensure transparency”.
The decision was an important victory for Hermès from a regulator hitherto mocked in the French business community as “weak with the strong and strong with the weak”.
LVMH will appeal, arguing that it has not had a fair hearing and that the decision is “flawed”.
For the 64-year-old Mr Arnault, a tall, aloof and taciturn man with sharp blue eyes, last week’s legal ruling was just a minor setback to his ambitions. As Pierre Godé, Mr Arnault’s right-hand man, says, LVMH will wait “a century, maybe two” for Hermès.
There is no doubt that it has been a great investment: LVMH is sitting on paper profits of €2bn from its canny bet during the 2008 market meltdown. Next, Mr Arnault sees synergies through co-operation.
Then there is Mr Arnault’s magpie attraction to glister. “He cannot see a beautiful brand without wanting it,” says a person who knows both sides and did not wish to be named. “Like Casanova, he must possess them all – it’s a compulsion with him.”
Mr Arnault’s business nest is stuffed with treasure – more than 60 brands – including Christian Dior, Louis Vuitton, Céline, Loewe, Givenchy and Berluti in fashion and leather goods; Guerlain perfumes; Bulgari and Chaumet in jewellery, while in spirits and champagne LVMH owns Dom Pérignon, Krug, Château d’Yquem, Cheval Blanc and Hennessy.
Acquiring Hermès would not only give Mr Arnault the world’s most desirable handbag manufacturer – prices start at about €4,000 – but it would also complement Louis Vuitton, where prices are similar to Gucci’s at an average of about €1,400 and where sales have slowed sharply.
From Hermès’ perspective, a takeover by LVMH would mean the slow death of the company founded by Thierry Hermès, a German-born harness-maker to European noblemen who set up shop in Paris in 1837.
The company, which still hand-stitches most of its bags, regards itself as one of the last bastions against the industry’s descent into what it calls “masstige” – the mass production of prestige goods.
LVMH’s brash, flashy approach to luxury is anathema to Hermès: new recruits at Louis Vuitton play a board game in which one of the questions is to name as many celebrities as possible in its advertisement campaigns.
The style of leadership is also different. At Hermès’ Paris Faubourg Saint-Honoré flagship store, the charismatic shadow of family patriarch Jean-Louis Dumas still looms large, despite his death just months before Mr Arnault made his move.
Mr Dumas combined creativity with business nous and a playful approach to luxury, characterised by his whimsical sketches and his mantra that Hermès should “grow but not get fat”. He groomed the dapper Mr Thomas, a family outsider. “The real reason for our objection to LVMH is cultural. We are not luxury. We are high-quality, based on exceptional artisanal work,” Mr Thomas says.
An anonymous modern building serves as Hermes’ headquarters. “The only influence that LVMH could have would be to jeopardise the vision that has made Hermès successful for the past six generations,” he says.
The competitive and sometimes prickly Mr Arnault does not appreciate a brush-off that treats him like a parvenu. The rejection, those close to him say, has made him even more determined to prevent Hermès from escaping his bearhug. He has increased his stake to 22.6 per cent, despite Hermès’ request that he desist.
“It was humiliating for him to be told he is not quality,” says another person who knows both sides and does not wish to be named. “Because the one thing Bernard can’t buy is other people’s opinion.”
In wooing Hermès, Mr Arnault has praised it as a “magnificent company” for which he has “good intentions” and no plan to take control. To which Mr Thomas riposted: “If you want to seduce a beautiful woman, you don’t start by raping her from behind.”
Hermès is already well protected from takeover through a limited partnership structure, likened by US activist investor Guy Wyser-Pratte to a medieval castle – “all that is lacking is the moat around the headquarters with a few crocodiles”.
But Mr Arnault is adept – some would say ruthless – in using family divisions to his advantage, although the Hermès family has so far remained united.
Liberation, the leftwing French daily, called him the Machiavelli of finance because of the way he wrested control of Louis Vuitton Moët Hennessy, the handbags and spirits group, from its family shareholders in 1990.
That operation prompted Mr Dumas to put in place the société en commandite par actions structure before floating 9 per cent of the company in 1993. Hermès shares trade at multiples almost as breathtaking as the cost of its bags – the company’s stock market value is bigger than Société Générale’s, despite revenues one-eighth of those of France’s second-biggest bank.
The takeover also led to a change in France’s stock market regulations – not the first time that tougher rules have followed Mr Arnault’s manoeuvres. The regulator last year tightened the loophole on disclosure of equity swaps, which had enabled LVMH to acquire its 17 per cent Hermès stake legally, without first having to declare thresholds of 5, 10 and 15 per cent.
Although his hardball tactics and sharp nose for profit ruffle feathers in France, they would not be out of place in the US, where Mr Arnault spent a few youthful years in Florida as a property developer. An accomplished pianist and avid art collector, Mr Arnault sees himself as a visionary with a passion for creation.
“What I like is the idea of transforming creativity into profitability. It’s what I like the most,” Mr Arnault told Women’s Wear Daily.
Mr Arnault’s big idea in an industry traditionally dominated by small, often family-owned artisanal enterprises was to acquire and consolidate such businesses into an enormously successful luxury conglomerate.
LVMH’s sales of €28bn last year – eight times Hermès’ – were bigger than those of Michelin, the tyremaker, or Alstom, France’s nuclear power and transport group.
“He has a relentless passion for excellence and execution,” says Henri de Castries, a friend who heads Axa, the French insurer.
Jean-Marie Laborde, chief executive of Rémy Cointreau and former head of LVMH’s Moët & Chandon, says: “He is very decisive. If you are discussing something with him, he will discern the one important point and ask your opinion. Then he’ll say: ‘OK, go away and do it.’ That aspect of working with him was very stimulating.”
Mr Arnault’s family controls 64 per cent of the votes in LVMH for an outlay of 48 per cent of the capital. This is thanks to a multi-layered series of holding companies as elaborate as a Dior haute couture ball gown. The luxury conglomerate model has been followed by others, including Switzerland’s Richemont, owner of Cartier, and Kering, respectively the world’s second and third-largest luxury groups. Hermès is different – it has expanded essentially through its single label.
Mr Arnault’s success, wealth and litigious bent earn him respect and fear. He is received abroad like a statesman because of LVMH’s importance as an investor – it is the employer most desired by French graduates – and he has powerful friends, including Nicolas Sarkozy, France’s former president.
“What we create is emblematic. It’s linked to Versailles, to Marie Antoinette,” Mr Arnault has said. Some senior executives refer to him simply as God. He drives managers hard but pays them well.
A former employee at Louis Vuitton says: “When he arrives, the doorman warns the receptionist, who buzzes up to the secretary, who tells her boss that he is on his way. And everyone stands up when he enters the room.”
The big question now is whether he will get his way with Hermès. Secret talks aimed at a rapprochement broke down last summer. Hermès has since launched a legal battle in the long-shot hope of having the swaps declared invalid, forcing LVMH to sell its stake.
Antoine Arnault, Mr Arnault’s oldest son and head of Berluti, the shoe maker, has launched a public-relations campaign aimed at countering what he calls the group’s “rather cold image based on its results or stock market performance”.
What is almost certain is that the fight will continue into the next generation – the sixth at Hermès – and possibly at LVMH, too.
Axel Dumas, the 43-year-old nephew of Mr Dumas, who is set to replace Mr Thomas by the end of the year, said last month it would be “the battle of our generation”.
Mr Arnault has no plans to retire. But this may be his last big fight, given tighter regulation and a move towards international norms.
Vincent de la Vaissière, author of an annual study of French captains of industry, says Mr Arnault is one of a handful of “predators of genius” in the nation’s business world. But he adds: “The race is probably facing extinction.”
Two views of craftsmanship in Paris suburbs
In Hermès’ largest factory, in the seedy Paris suburb of Pantin, more than 300 artisans work in natural light around a soaring glass atrium.
The leather goods made here include the group’s famed Kelly bags – which were a favourite of Princess Grace of Monaco – and the more sporty Birkin bag, designed for Jane Birkin, the singer who met former Hermès chief executive Jean-Louis Dumas on an aeroplane and told him what she wanted in a dream bag.
The distinctive feature of Hermès’ production is that one artisan makes a single bag from start to finish, only using a machine to sew the inside pocket and zips.
The seams are sewn with a double stitch that involves using needles in both hands in a simultaneous flourishing gesture. The artisans have at least two years’ training. It takes about 18 hours to make a Kelly, which retails for more than €6,000 in a small version.
Because of the time needed to train artisans, supply lags demand and customers typically have to wait months for the bag of their choice.
Louis Vuitton’s 1859 atelier at Asnières, also in northern Paris, is where Patrick-Louis Vuitton, a fifth generation of the family of trunkmakers, supervises special orders and the making of the brand’s distinctive luggage. Most of the sewing is done by seamstresses using electric sewing machines. Some parts are hand-dyed and sewn.
Vuitton’s production is famed for its efficiency, with teams handling the assembly: one person is responsible for cutting the leather, another for the stitching, another for the fastenings.
LVMH has cranked up references to its artisans since taking its Hermès stake in 2010, inviting the public to “meet the artisans” through the launch of its journées particulières, first held in 2011, and again last month.
According to Benoît Boussemart, author of a book on French family fortunes, there is no comparison between the two when it comes to craftsmanship, citing figures showing that 43 per cent of Hermès’ workforce is employed in production activities, compared with 15 per cent at LVMH.
Get alerts on European companies when a new story is published