We now know how this man — LVMH chairman Bernard Arnault — managed to amass a 17 per cent holding in Hermès without anyone knowing, and at a purported 50 per cent discount to the prevailing market price
As suspected, the ‘Wolf in the cashmere coat’ owned a 4.9 per cent stake in Hermès which he topped up using “equity swaps,” according to a statement from the French stock market regulator AMF.
Here (via Google Translate) are the relevant paragraphs:
On 21 October 2010, Sofidiv SAS (company LVMH) acquired contracts on financial futures called “equity swaps” entered into by two companies of the LVMH group with two financial institutions in the first half of 2008, respectively on the equivalent of 5 million and 4.8 million shares HERMES INTERNATIONAL, whose deadlines were set between January and May 2011. . Then, that same day, Sofidiv SAS and financial institutions have entered into amendments to these contracts for an outcome by physical delivery of underlying securities.
On 22 October 2010, SAS has acquired Sofidiv contract term financial instruments known as “equity swap agreement with a financial institution in the second quarter of 2008 (the deadline was in June 2010, subsequently extended to June 2012) by a company of the LVMH group, covering the equivalent of 3,001,246 shares HERMES INTERNATIONAL.
On 24 October 2010, Sofidiv SAS and the financial institution have entered into an addendum to this contract for a settlement by physical delivery of underlying securities.
Now, what’s clever here is the way the Wolf took full advantage of a loophole in French stock market disclosure rules to acquire just over 12 per cent of Hermès on the quiet. The trick was to use cash-settled equity swaps and then switch the terms to physical settlement.
Colette Neuville, a French activist shareholder explains.
From Bloomberg:
Under disclosure rules implemented last year by the AMF, an investor must report any acquisition of securities that entitle it to more than 5 percent of a company’s equity. Yet LVMH’s purchase of the Hermes stake may have exposed a problem with a second set of disclosure rules for cash-settled securities where there is no expectation shares will be physically delivered, said Colette Neuville, a French shareholder activist.
“You have a cash contract for two, three years, however long you want without declaring anything because it’s in cash, and the day you want to take the shares, you change the contract,” Neuville said of LVMH’s statement. “Each operation is legal in itself, but the combination of them is what makes for a skirting of the regulations.”
The Wolf was able to switch the terms of the contract so easily because the three banks on the other side of the equity swap had been hedging their positions in the underlying stock. The shares were therefore on hand to deliver.
And these banks never had to report their hedges because they never breached the 5 per cent disclosure threshold.
Pretty smart, eh?
Whether these manoeuvres prompt a further tightening of French stock market rules is not yet clear — the Autorité des Marchés Financiers says it is reviewing the stake purchase. But one can’t help feeling if an overseas company — say Burberry — had pulled this stunt then there would be an immediate clampdown. As it is, Hermès’ future as a French company looks secure.
Alls well, that ends well.
Related link:
LVMH used equity swaps on Hermès – FT