PARIS — French billionaire Bernard Arnault’s decision to bring Christian Dior Couture into the LVMH fold drew cheers from analysts and investors, who welcomed the luxury conglomerate’s move to plump its already strong portfolio of fashion and leather goods brands.
Shares in LVMH Moët Hennessy Louis Vuitton shot up 3.9 percent to close at 223.15 euros, or $244 at current exchange rates, on the Paris Stock Exchange on Tuesday after the group said it would make an offer to buy Christian Dior Couture for 6.5 billion euros, or $7.06 billion.
“Overall, we think this deal is strategically good for LVMH, strengthening its already well-balanced portfolio with another top brand, and also giving it room to improve its earnings through further scale and synergies,” Bernstein Research said in a note.
The move will make Dior the second-largest brand in LVMH’s fashion division, behind Louis Vuitton and ahead of Fendi, reuniting its fashion and fragrance activities under a single umbrella — though Dior chief executive officer Sidney Toledano said he did not expect planned synergies to result in job cuts.
In tandem, Groupe Arnault, the investment firm controlled by the Arnault family, will make an offer of up to 12.1 billion euros, or $13.2 billion, for the 25.7 percent stake in the Christian Dior Group that it does not currently control, using its remaining stake in rival Hermès International as partial payment.
Presently, the Christian Dior Group includes Christian Dior Couture and LVMH. Christian Dior Couture encompasses the brand’s apparel, accessory and jewelry businesses, while the perfume and cosmetics lines are exercised under the umbrella of LVMH.
“We are reuniting the two houses, which will allow for even greater synergies and a continued growth in the potential of this house,” Arnault, who is chairman and ceo of LVMH, told a hastily convened press conference at LVMH’s headquarters on Avenue Montaigne.
“It’s as if there had been a missing family member,” Toledano said afterward. “It’s important for the brand to speak as one, in a clearer manner.”
Arnault noted the deal would simplify the structure of LVMH and reinforce his family holding’s grip on the group, which controls brands including Sephora, Bulgari, Guerlain and Moët & Chandon. Groupe Arnault’s stake in LVMH will rise to 46.8 percent from 36.2 percent previously.
“It’s an investment that shows our confidence both in the French economy and in the potential of the LVMH group internally,” Arnault said.
The executive reiterated his recent warnings that the luxury sector could be headed for its biggest correction since the 2008 collapse of Lehman Brothers, but said he was planning for posterity.
“I have always run my businesses with an eye on the medium-term, so I am used to LVMH weathering crises. We have experienced one every 10 years and at the end of the day, we have always come through relatively unscathed, so I am gearing up for the next one with a certain degree of serenity,” he said.
The timing of the operation reflects the strong performance of Dior and favorable market conditions, with historically high share prices and low-interest rates allowing LVMH to offer its shareholders a good deal and borrow the full amount of the buying price.
“This is a good acquisition for LVMH in our view given the strong brand of Christian Dior, good use of its balance sheet and reunites the Christian Dior brand with the very profitable perfume operation that LVMH operates,” Barclays said in a research note.
Dior, which celebrates its 70th anniversary this year, has come a long way since Arnault bought the brand in 1984 as part of a bankrupt textile group. The brand’s revenues have doubled in the last five years to reach two billion euros, or $2.2 billion at average exchange rates, in the 12 months ended March 31.
Its earnings before interest, taxes, depreciation and amortization, or EBITDA, totaled 418 million euros, or $459 million, with the EBITDA margin rising above 20 percent of sales for the first time.
The simplified public offer for Christian Dior Group, to be filed with France’s stock market regulator AMF at the end of May, will consist of two-thirds cash and one-third shares in Hermès International.
If fully subscribed, it will entail Groupe Arnault getting rid of all its shares in Hermès, putting to rest any lingering speculation that Arnault was plotting an eventual takeover after triggering a protracted battle with the rival luxury firm with his stealthy acquisition of a 17.1 percent stake in Hermès in 2010.
Groupe Arnault still owns 8.4 percent of Hermès International’s capital, worth around four billion euros, or $4.3 billion.
The deal values each Christian Dior Group share at 260 euros, or $282.85. This represents a premium of 14.7 percent over Monday’s closing share price, and of 32.8 percent over the six-month share price average.
Shares in Christian Dior SE closed up 11.1 percent at 252.00 euros, or $275.63, while Hermès International was down 4.5 percent at 440.75 euros, or $482.03.
Christian Dior Couture’s enterprise value of 6.5 billion euros is equivalent to 15.6 times its EBITDA, a ratio which Jean-Jacques Guiony, chief financial officer of LVMH, said was in line with recent luxury sector acquisitions. It will be accretive to LVMH earnings per share from the first year.
“We are probably paying a slightly high price, but in 30 years, we will surely be glad we did it,” Arnault remarked.
Analysts said the valuation seemed fair, with Bernstein noting Dior’s growth potential, opportunity to improve profitability after a period of heavy investment and synergies with other brands.
Guiony said these included further integration in media buying and real estate management, as well as centralizing debt. Toledano said Dior would take advantage of LVMH’s support services, including its human resources, finance and IT teams, but plans to retain its 5,000 employees.
“There will be synergies on the administrative side, but we are not going to eliminate positions,” he said.
Further boosting Dior’s valuation are real estate assets including eight flagship buildings in prestigious locations such as Avenue Montaigne in Paris, New Bond Street in London and Ginza in Tokyo, as well as eight production facilities in France and Italy making shoes, handbags and costume jewelry, Toledano said.
Guiony said that after a lengthy development phase, Dior now benefits from three powerful assets: critical size, profitability and control over its sales, with 93 percent of revenues generated by its global network of 198 stores.
“Christian Dior Couture’s historic proximity to LVMH should not obscure the fact that this is an extremely strategic and important operation for LVMH,” he said. “There are not a lot of brands with revenues of more than 2 billion euros, and even fewer within Christian Dior Couture’s specific positioning.”
Toledano, who has run the brand since 1998, said the acquisition represented a new challenge, noting that he has no plans to retire anytime soon. “I am not a good golf player,” he said with a smile.