LVMH tosses Hermès on the discount rack


This Hermès tie-up has just come undone.

As models prepared to hit the catwalk for New York Fashion Week, French luxury house LVMH and rival Hermès set aside their differences and put fashion first. LVMH, owner of the Louis Vuitton brand, said Wednesday morning it would distribute its roughly 23 percent stake in rival Hermès to its shareholders and promised not to buy any more for five years.

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The move effectively ends a multiyear handbag war that began in 2010 when LVMH revealed it was accumulating Hermès shares. The family-controlled maker of Birkin and Kelly handbags appeared concerned LVMH was trying to take control. Hermès fought back, accusing LVMH of market manipulation. In turn, LVMH criticized Hermès for waging a "smear campaign" during a heated public hearing in 2013.

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But in a flowery statement Wednesday, the heads of the two companies both expressed "their satisfaction that relations between the two groups, representatives of France's savoir-faire, have now been restored."

Hermès shareholders might not share the enthusiasm. Shares of the Paris-listed company fell as much as 11 percent in early trading Wednesday, later finishing the session down 3 percent. The likely explanation: With LVMH and CEO Bernard Arnault no longer pursuing Hermès shares, the company shouldn't carry a takeover premium.

Indeed, it appears a decent chunk of Hermès' valuation reflects hopes that the company will be acquired. Hermès trades at almost 30 times forward earnings, a 78 percent premium to the European luxury sector average, according to Mario Ortelli, an analyst with Sanford C. Bernstein. Since LVMH's stake became apparent in 2010, Hermès has traded about 6 multiple points higher than over the previous decade, Ortelli said.

It's unlikely any other suitor will swoop in to acquire Hermès. Since the battle with LVMH began, various parts of the Hermès family banded together to consolidate more than 50 percent economic and voting control of the company. Any buyer, particularly one from outside of France, would likely have a tough time overcoming that obstacle. And with control of the company, the Hermès family itself has little motivation to buy more shares. A spokeswoman for Hermès declined to comment.

One potential benefit of LVMH's move: There will be more Hermès shares to go around. The stock previously traded very lightly because so much of it was held by LVMH and the Hermès family. It's possible that the stock will now be included in major indexes such as France's CAC 40. Even so, investors who own LVMH will wind up with some Hermès shares after the distribution, so it's unclear how much new demand will appear.

That means Hermès shares are much more likely to trade based on fundamentals. To be clear, Hermès is generally considered the strongest listed luxury brand in the world. Customers often endure several months of waiting before paying $10,000 or more for a Birkin handbag. That helped the company eke out sales gains even during the darkest days of the crisis when broader luxury sales plummeted.

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But exclusivity has its costs. If Hermès grows too quickly it risks hurting its ultra-exclusive image. Companywide sales rose 7.8 percent in 2013, and analysts expect gains of about 10 percent annually for the next few years. While that's a healthy pace, it's well below growth rates at most companies that command such multiples.

And even Hermès isn't immune to regional weakness in markets like China, where a government crackdown on bribes has hurt demand for luxury goods. Similarly, weak emerging-markets currencies are a risk that's beyond any company's control.

With LVMH out of the picture, patient investors may at last see Hermès go on sale.

—By's John Jannarone