By and  on September 3, 2014

PARIS — The acrimonious, four-year standoff between LVMH Moët Hennessy Louis Vuitton and Hermès International has ended in a surprise entente cordiale.

The French luxury rivals, which traded barbs and lawsuits over LVMH’s creeping 23.2 percent stake in Hermès, said Wednesday they agreed to a conciliation brokered by Franck Gentin, president of the Commercial Court of Paris.

According to sources, Gentin designed the scheme and, last week, organized a joint meeting between the warring companies following weeks of under-the-radar negotiations.

The two parties signed an agreement that will see LVMH distribute its Hermès stake to shareholders, passing through Groupe Arnault, which controls about 70 percent of Christian Dior SA, which in turn holds a 45 percent stake in LVMH.

The stake in question is worth an estimated 6.5 billion euros, or $8.53 billion at current exchange rates, and reflects a total capital gain realized by LVMH of 3.8 billion, or $4.98 billion, according to sources and analysts’ tallies.

LVMH, Dior and Groupe Arnault — companies controlled by Bernard Arnault — also agreed not to acquire any shares in Hermès for the next five years, leaving the door open to potential synergies between the two companies in the future.

According to a joint statement, the distribution of shares, subject to board approval at LVMH and Dior, is to be completed no later than Dec. 20, with one Hermès share offered for each 21 LVMH shares. At that time, Groupe Arnault will hold around 8.5 percent of the capital of Hermès International.

The truce also puts to an end to “all related actions” between the two companies, alluding to a series of defamation claims and criminal complaints on both sides. Hermès had accused LVMH of insider trading, share-price manipulation and complicity, with LVMH striking aback with a claim of false accusation with the public prosecutor, and an action against Hermès executives for damages and personal liability.

Wednesday’s statement said Hermès chief executive Axel Dumas and Arnault “both express their satisfaction that relations between the two groups, representatives of France’s savoir-faire, have now been restored.”

LVMH declined to comment further, as did Hermès.

Analysts applauded the mending of relations, with Mario Ortelli at Bernstein Research trumpeting it as “the divorce that makes everyone happy” — except Hermès shareholders, who can expect weakness in the share price in the short term, as takeover speculation had inflated its value in recent years.

On Wednesday, Hermès shares fell 3.4 percent in trading to close at 253.75 euros, or $333.01, on the Paris Bourse, while LVMH gained 2.9 percent to 136.90 euros, or $179.66.

“Overall, this is a positive development, as it ends years of legal battles and allows LVMH to monetize the value of its Hermès stake,” agreed Laura Levy, luxury researcher at Barclays. “Hermès is gaining in liquidity while the bid premium is likely to disappear.”

Antoine Belge, analyst at HSBC in Paris, estimated that the free float of Hermès, which shriveled to about 6 percent of the share capital following LVMH’s stake building, should “technically increase” to around 20 percent, “which is likely to raise investors’ interest in Hermès.”

The mending of relations could also reduce M&A speculation.

“If LVMH had placed its Hermès shares on the market, investors might have been concerned that LVMH was raising cash in order to finance an expensive acquisition,” Belge noted, characterizing the cease-fire as a case of “might as well make nice and start a relationship afresh — and hope that the next generation of Hermès shareholders change their minds about the family vision that the company must remain independent.”

LVMH had long insisted its investment in Hermès was purely financial, even if Arnault once vowed that he would be a “peaceful but not passive” investor, expressing hopes of collaborating in a way “that is constructive and beneficial to the company.”

Shortly after that declaration, Hermès’ then-ceo Patrick Thomas made it clear working together would never happen.

“If you want to seduce a beautiful woman, you don’t start by raping her from behind,” Thomas told a press conference in March 2011, ratcheting up the rhetoric in a long festering stalemate.

Hermès executives had repeatedly urged LVMH to reduce its shareholding, and constructed defenses against a full takeover.

In 2012, Hermès grouped family-owned shares into a nonlisted holding company. The Dumas, Puech and Guerrand families collectively own more than 70 percent of the shares in Hermès, a limited partnership structure that guarantees they keep control of management. The H51 holding company grouped 50.2 percent of the firm’s capital and has priority purchasing rights on the remaining shares held by the family members participating in the initiative — some 12.6 percent of capital.

Hermès won a small victory last year when France’s stock market regulator AMF slapped LVMH with sanctions over the way the luxury conglomerate amassed its initial 17.1 percent stake in the maker of Kelly and Birkin bags. AMF ordered LVMH to pay 8 million euros, or $10.5 million at current exchange, the largest fine it had ever imposed.

But signaling a possible denouement, LVMH indicated at the time it would not appeal the AMF fine, even if it felt it would be justified in doing so, arguing it never breached regulations regarding ownership thresholds or engaged in insider trading or market manipulation.

LVMH surprised markets in October 2010 by revealing it had amassed a large stake in Hermès via cash-settled equity swaps that allowed it to circumvent the usual regulations requiring firms to declare share purchases.

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