Arnault’s Hermès deal needs tough scrutiny

October 27, 2010

PARIS – French luxury conglomerate LVMH insists that it was “fully compliant” with French regulations in amassing its surprise stake in iconic luxury house Hermès International. Autorité des Marchés Financiers, the French markets regulator, demands a formal declaration every time an investor crosses a 5 percent threshold in a listed company. Yet the maker of Vuitton bags only disclosed on Oct. 23 that it held 14.2 percent of Hermès — a stake it has since taken to 17.1 percent after settling some derivatives contracts. LVMH says what it did was legal, but this may simply be proof that the rules must change.

There are obvious oddities in LVMH’s announcement that its average acquisition price for the Hermès stake was 80.5 euros a share — a price last seen in March 2009. The stock is currently trading at more than twice that level. Hermès’ controlling family says it still collectively owns 75 percent of the company’s shares, and that no significant family-owned stake was sold to its larger rival.

LVMH isn’t yet saying how it bought a major chunk of the limited float — but it’s hard to see how it could have acquired it at market prices while complying with the rules. Assume, for the sake of argument, that it first bought some 4.99 percent of Hermès, allowing it to remain under the radar. Assume, too, that the shares were bought at their decade’s lowest — around 50 euros a share, which could have last been done in 2005. Then the average price for the rest of the stake would have been around 93 euros. The latest date the market price was that low was July 2009. But if LVMH had gone over the 5 percent threshold then, it couldn’t have waited 15 months to disclose it.

LVMH also says it used derivatives. This at first glance might seem to open a loophole. But in August 2009, the AMF tightened its disclosure rules to include in the 5 percent threshold any kind of instruments that “give access to shares” of a given company. This seems to cover most types of options. At the time, the AMF also required investors that held options under the previous regime to comply with its new edict.

LVMH is expected to disclose publicly in a few days how it built up its stake. It will be up to the AMF to verify that it complied not only with the letter of the law but also with its spirit — and if it finds unexpected loopholes, to act promptly to close them.

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