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UPDATE 1-LVMH's Hermes stake targeted by preliminary probe

Friday, 12 Oct 2012 | 2:12 PM ET

* LVMH declines to comment

* French AMF regulator carrying out parallel probe

(Adds background)

PARIS, Oct 12 (Reuters) - Paris prosecutors have launched a preliminary criminal investigation into the conditions surrounding luxury group LVMH's building of a stake in bag maker Hermes , the Paris prosecutor's office said on Friday.

The move is a potential boon for Hermes, which last month asked prosecutors to open a probe into alleged insider trading and share manipulation by LVMH related to its shock stake-building two years ago.

The financial crimes unit of the French police is making preliminary checks, according to an official at the prosecutor's office. The prosecutor could subsequently either hand the case to an independent investigating magistrate or drop it altogether.

LVMH, which has built up a stake of 22.6 percent in Hermes, declined to comment.

After Hermes sought the probe last month, LVMH, led by billionaire businessman Bernard Arnault, said it planned in turn to file a complaint for "blackmail, slander and illegal competition" and repeated that its initial stakebuilding was "perfectly regular".

The luxury goods company already controls brands from Louis Vuitton to Bulgari but Arnault is widely believed to be fascinated by the rarified quality of Hermes, known for its 15,000 euro Kelly and Birkin leather bags and 400 euro silk scarves.

France's AMF stock market regulator, which is holding a parallel investigation into the case, said earlier this month it did not believe LVMH had engaged in insider trading or share price manipulation when it bought its first 14 percent stake in Hermes in 2010.

LVMH acquired its 14 percent stake, which it quickly raised to 17.1 percent, through equity derivatives that allowed the luxury group not to declare its holding. It is normal practice for prosecutors to ask the AMF for advice before launching a formal investigation.

The AMF has transferred the case to its sanctions committee to decide whether LVMH had done anything wrong. The panel is due to examine the case in the first few months of next year.

The legal loophole allowing a party to stealthily use derivatives to build up a stake in a listed company, has recently been closed, following amendments to French law.

LVMH's stakebuilding has led to a feud between it and Hermes, which views the move as hostile and has created a majority family shareholding to protect it from a takeover by Arnault.

(Reporting by Thierry Leveque; Writing by James Regan; Editing by Christian Plumb)

((james.regan@thomsonreuters.com)(+33)(0)(1 49 49 53 84)(Reuters Messaging: james.regan.thomsonreuters.com@reuters.net))

Keywords: LVMH HERMES/