Hermes, LVMH & Diageo's Tangled Web and Bain's Big Forecast


Robb Young | October 25, 2010

Our weekly analysis of the must-read luxury news headlines

The Ultimate Takeover?

Bernard Arnault, chairman and CEO of LVMH, a clutch by Louis Vuitton and a clutch by Hermès

It’s not often that a single story can dominate a week’s worth of news. But it soon becomes apparent that this is anything but your ordinary acquisition story when, only months after the patriarch of one of the world’s most exalted luxury brands dies, the brand then finds itself tangled up in what looks to some like the beginnings of a hostile takeover bid by its only real leather goods rival. Such is the dramatic scenario which the French executives behind Hermès and Louis Vuitton find themselves in ever since Louis Vuitton’s parent company announced its sudden ownership of 14.2-17.1% of Hermès.

Although LVMH has denied that its furtive stake in Hermès is indicative of any intention to launch a takeover and Hermès has said that it is protected by both its unusual corporate structure and a united family, analysts are quick to point out that the most likely way that LVMH acquired the stake was through rogue family members selling their shares. Speculation is rife that if enough discord is created within the extended Dumas family (more than 50 of its scattered members collectively own the family’s controlling 70% of Hermès), that LVMH could swoop in and raise its equity to much closer to the majority mark in a relatively short period of time.

Reuters quoted Bernstein luxury analyst Luca Solca who said, “What happens next very much depends on the reaction of the key remaining equity holders. It’s clear LVMH is now in pole position to grow further in Hermes, if the right conditions appear. LVMH could potentially add important value to Hermès long term.”

“ LVMH is playing a waiting game…[and]…putting itself in pole position for an outright acquisition ”

Diageo’s Crown Royal whisky and LVMH’s Hennessy cognac

Bloomberg, however, managed to get what appeared to be a much more candid appraisal by the same analyst. “LVMH is playing a waiting game…[and]…is putting itself in pole position for an outright acquisition as the conditions appear.”

To add to the already tangled web, The Daily Telegraph revealed the very next day that its sources had all but confirmed rumours that LVMH’s stake in Hermès could very well mean an imminent divesture of LVMH’s spirits division to British giant Diageo. If The Daily Telegraph’s sources are credible then not only are industry insiders “bracing themselves for Mr Arnault’s ‘check mate manoeuvre’,” but “advisers to Diageo have [also] been put on red alert for a possible £10.6bn takeover of Moet Hennessy, LVMH’s drinks division.”

Forecasts & Finances

Although the headline might have been a bit on the sensationalistic side, this week’s Economist pronounced something that a slew of other publications also uttered but with much less conviction. The authors of ‘Bling is Back’ weren’t really suggesting that there would be a return to diamond-encrusted design trends. What they meant to highlight was a new forecast pointing to the sparkling recovery of the global luxury goods market by the end of 2010. Bain & Co.’s latest report for Altagamma predicts 10% growth for this year, citing robust demand across much of Asia, a boom in e-commerce, retail tourism and unexpected pockets of confidence in America.

The Wall Street Journal’s take on the Bain report picked up on the less optimistic figure for next year when “the pace of growth should slow to between 3% and 5% to €173 to 176 billion, up from €170 billion in 2007.” Reuters, meanwhile, contrasted the high performing categories of leather bags, shoes, jewellery and watches predicted to grow at 8% next year with the low performing yacht industry which will “continue to fall at double-digit rates this year to an estimated €6.4 billion, Bain said, with smaller boats reacting better to the unfavourable sales environment.”

The Financial Times and BusinessWeek put a spin on the forecast by investigating how macroeconomic policies and currency fluctuations between the euro, the dollar and the renminbi will impact things further.

“ Overall the weakening dollar and strengthening euro will be bad for European luxury goods companies ”

“About 75 per cent of luxury goods are manufactured and produced in Europe, while about the same amount are sold to consumers in markets outside the continent, especially the US and China… Luca Solca, a senior analyst at Bernstein Research, says overall the weakening dollar and strengthening euro will be bad for European luxury goods companies, which have this year benefited from a weak euro,” the FT’s Rachel Sanderson concluded.

BusinessWeek ’s focus was on the impact of the strong Swiss franc by soliciting an assessment from wealth management firm Stonehage Group which tracks prices of luxury goods and services. “Consumers in Switzerland benefited during the year as the Swiss franc strengthened against the world’s leading currencies,” said a spokesperson for the group who estimated that the cost of luxury living in Switzerland fell 6.2% .

The flip side of the country’s luxury equation was chronicled by WWD, which noted that “watch exports rose 20.8 percent between January and September to 11.3 billion Swiss francs, or $10.61 billion.” Once again, strong sales in Asia – particularly in China – was credited with the resilience of the luxury timepiece sector in spite of the franc being at a disadvantage due to its strengh against other currencies.