LVMH’s Arnault Seen Staying on M&A Path After Hermes Retreat

By Andrew Roberts

Bernard Arnault, the billionaire who built his luxury empire and name as a serial dealmaker, suffered a rare setback yesterday when he agreed to loosen his grip on Hermes International SCA. (RMS) The retreat is unlikely to diminish his appetite for mergers and acquisitions.
LVMH Moet Hennessy Louis Vuitton SA, (MC) the company run by Arnault, “is a consolidator,” Luca Solca, an analyst at Exane BNP Paribas, said by e-mail.
As sales growth slows at LVMH, smaller family-controlled companies such as Salvatore Ferragamo SpA, Tod’s SpA or Clarins SA may be on Arnault’s radar, according to John Guy, an analyst at Berenberg Bank in London. LVMH, which reported a decline in first-half profit, could also look at buying Burberry Group Plc or Tiffany & Co. (TIF), the analyst also said.
“He’s certainly not going to hang up
his acquisition boots,” Guy said of Arnault. “At any particular time there are opportunities, but they will have to be mutually agreeable.”
Arnault, 65, has developed a reputation as a dealmaker in the 25 years since he took over Paris-based LVMH, spending $11.6 billion on purchases in the past decade alone, more than twice the amount of his closest European rival, according to data compiled by Bloomberg. The descendants of Hermes’s founder were concerned enough to pool their shares in a holding company to protect against a possible takeover.

Photographer: Balint Porneczi/Bloomberg

Bernard Arnault, Chairman and Chief Executive Officer of LVMH Moet Hennessy Louis Vuitton SA.

Other Avenues

After a French court intervened, LVMH said yesterday it will distribute the 23 percent stake to its shareholders and institutional investors, almost four years after the world’s largest luxury-goods company started building the holding without Hermes’s knowledge.
Hermes has been at loggerheads with LVMH over the stake, most of which was amassed via equity swaps. The move sparked legal action as well as demands that Arnault reduce the shareholding.
The distribution of the investment, due to be completed by Dec. 20, will leave the billionaire’s family holding company Groupe Arnault with an 8.5 percent interest, LVMH said.
LVMH eased 0.7 percent to 135.95 euros at 10:12 a.m. in Paris, relinquishing some of yesterday’s 2.9 percent gain.
Stepping back from Hermes means Arnault may have to explore other avenues to extend a string of deals that has included jeweler Bulgari SpA, bought for 3.7 billion euros ($4.9 billion) in 2011, and Loro Piana SpA, the Italian cashmere clothier in which it acquired an 80 percent stake for 2 billion euros.

Acquisition Funds

Clarins, owned by its founder’s family, is one possibility, according to Guy. The French maker of anti-aging serums, which Exane BNP Paribas estimates has annual revenue of more than 1 billion euros, would bring technical expertise and complement LVMH’s fragrance lines, CA Cheuvreux analysts have said.
Ferragamo is the most likely takeover candidate among mid-sized listed Italian luxury companies, according to Exane BNP Paribas. The Florence, Italy-based shoemaker, which last week reported second-half earnings that exceeded analysts’ estimates, has a market value of about 3.8 billion euros.
Burberry, (BRBY) worth about 6.5 billion pounds ($11 billion), and Tiffany, with a market capitalization of about $13 billion, would be even costlier targets for Arnault.
LVMH may be able to spend as much as 10 billion euros on deals, according to Mario Ortelli, an analyst at Sanford C. Bernstein.

Debt Ratio

“We expect LVMH will continue to be active in acquisitions to put to work its cash and low leverage ratio, and exploit the unique synergies that its size makes possible,” Ortelli wrote in a note to clients yesterday.
A net debt ratio of 0.8 times earnings before interest, tax, depreciation and amortization “suggests significant additional headroom to take on additional debt to fund future acquisitions and positions the group for when the appropriate targets become available,” Ortelli wrote.
Still, distributing the Hermes stake to LVMH shareholders, rather than selling it in a private placement, may indicate that Arnault doesn’t have a deal on the horizon, according to Antoine Belge, an analyst at HSBC in Paris.