LVMH banks on luxury

Having sneakily nabbed 17% of Hermes, LVMH looks to Asia for growth.

When luxury powerhouse LVMH Moët Hennessy Louis Vuitton SA announced they’d amassed a 17.1% stake in boutique luxury house Hermès International SCA, both the regulators and Hermès itself were stunned. In France, laws usually require a declaration to be made when ownership increases beyond 5%, and for every 5% gain afterward. Hermès’ family owners, who have taken stock and estimate they own 73.4% of the company, were furious, and wasted no time in stating that if Bernard Arnault, CEO and chairman of LVMH, intends to be “friendly,” he needs to withdraw his investment immediately. Meanwhile, Jean–Pierre Jouyet, chairman of the Financial Markets Authority, said they would look into the matter, saying the country’s poor regulations make France the “Wild West” of takeovers.

LVMH declared it would have no problem with an inquiry, since it was some cleverly structured equity swaps organized by LVMH in 2008 — through a number of derivative contracts — that allowed the company to squeeze through a loophole left open by France’s disclosure rules after they were tightened in 2008. But Arnault said while his acquisition was friendly, he wouldn’t rule out buying more of Hermès, depending on market conditions. He did say he would not seek to take control of the company, was pleased with the way Hermès is run, and did not want a seat on the board.

But the Hermès family is right to be worried. Arnault has been a shrewd businessman from the beginning of his interest in the luxury market in 1984. He began by stripping the dead weight from a bankrupt textile and disposable diaper maker, Boussac Saint–Frères. He kept Dior, along with a department store, and concentrated on defining the brands. Then, Arnault set his eye on LVMH. In 1988, he positioned himself as an investor in Louis Vuitton. He saw that there were disagreements between LV, and the beverage purveyors, Moët–Hennessy. He recognized where loyalties were weak, and through numerous, arduous legal battles, he kept buying stake in the company and finally pushed the former chairman out in 1990. France was used to more civilized business dealings, and Arnault’s hostile actions earned him his reputation as an American–style raider.

Hermès’ owners argue that they’re less bothered by Arnault’s financial stake than the idea that he might one day absorb the brand and dilute it. Hermès CEO Patrick Thomas said recently that the dispute is “not a financial battle, it’s a cultural battle,” and that Hermès’ quality craftsmanship and long–standing traditions don’t belong in a conglomerate.

But Arnault is focused on expansion in emerging markets, and Hermès proved it is, too, with its launch of a collection for its new Chinese luxury brand, Shang Xia, in September. Meanwhile, LVMH and Macau billionaire Stanley Ho together invested $502 million in a commercial complex on L’Avenue Shanghai. The project, which is expected to be completed in 2012, will be home to 49,000 square metres of luxury shopping space. Both efforts have been well–received. Arnault said last year that countries like China, Russia and India provide opportunities for the expansion of luxury brands, because consumers are becoming increasingly interested in buying status–symbol products.

Unfortunately for Hermès, its common goals with LVMH may very well prove to be a dangerous threat to its autonomy. As Arnault’s wife, Canadian concert pianist Hélène Mercier, once said of him, “He doesn’t know half–measures. And he hates to lose.”