They don’t call Bernard Arnault the “wolf in the cashmere coat” for nothing.
The latest master-stroke from France’s richest man is the acquisition of 17 per cent stake in Hermes International at a 50 per cent discount to the prevailing market price.
But how did he manage to buy that much of the world’s greatest luxury goods brand at the equivalent of just €80 a share?
Citigroup for one is puzzled:
It is unclear how LVMH managed to purchase 15 million shares (and 3 million options) at this attractive price, although it might include a trading profit on derivative instruments. We do not know at this stage whether members of the Guerrand, Dumas and Puech families of Hermes have been involved in this transaction by selling shares to LVMH. March 2009 constituted the last time Hermes’ shares traded around €80 and is, in our view, the point from which this position might have been built over time.
The Sunday Telegraph reckons Arnault bought most of his stake (14 per cent) from a distressed seller. Given that Hermes is a pretty illiquid stock, placing that much of the company (as rumoured in the article) would require some sort of discount.
But 50 per cent? If so, that must rank as one of the worst disposals in recent stock market history and the seller must have been really distressed.
In Saturday’s statement, LVMH said it held derivative instruments over 3m Hermes shares and intended to convert them. So it is possible that these instruments lowered the average price LVMH paid per Hermes share.
But City traders say there are other ways LVMH could have amassed a position in Hermes without alerting the market.
Here’s one theory, which would not have infringed any stock market rules. Let’s imagine that LVMH owned a 4.9 per cent stake in Hermes. (Note the disclosure threshold on the Paris bourse is 5 per cent). And at the market trough in March 2009, LVMH bought Hermes calls deliverable in October 2010 at an implied price of under 80-a share. Those calls were exercised last week and LVMH then disclosed its 17 per cent.
Now, if this is correct, then whoever wrote the call option (probably a French bank like SocGen or BNP Paribas) would be nursing a nasty loss of €500m – unless, that is, they managed to hedge their position in the underlying stock. But how would they have done this without breaking the 5 per cent disclosure threshold?
The answer would be that LVMH bought its calls from several banks and there would have been no need for these banks to disclose their hedging positions if they owned less than 5 per cent of Hermes. If true, this would have echoes of the famous Porsche raid on VW.
But this is all just conjecture and the Telegraph claims that full details of the transaction – along with the identity of the seller(s) – are set to be filed with the French financial regulator, the AMF, by Wednesday.
At which point we should get a much better idea of how the Wolf managed to pull off his latest very profitable coup. The mark-to-market valuation of the 17.1 oer cebt stake would create an instant “paper profit” of €1.7bn or €3.5 per LVMH share, according to Citi.
Related links:
LVMH bags €1.45bn stake in Hermès – FT
LVMH/Hermés – FT
LVMH could not resist attraction to Hermès – FT