PARIS (The Deal) -- France's Hermes International has won its long battle to rid itself of LVMH Moet-Hennessy Louis Vuitton after France's largest luxury goods group agreed to hand its shareholders a 23.1% stake in the scarves and handbags maker.
The deal, which was announced Wednesday will bring to an end legal action by both parties related to LVMH's holding, which Hermes had claimed was unlawfully built because LVMH used derivatives to circumvent disclosure rules.
"LVMH Group will distribute all its Hermes shares to its shareholders, on the understanding that LVMH's largest shareholder, Christian Dior will in turn distribute the Hermes shares it receives to its own shareholders," said Paris-based LVMH. "By virtue of the agreement ... LVMH and Hermes have brought to an end the conflict, and all related actions, between them."
The agreement, which encompasses about 6 billion euros ($7.9 billion) worth of shares, will not completely rid Hermes of an interloper that former CEO Patrick Thomas likened to a "stranger in the family garden." Group Arnault, the holding company of LVMH Chairman and CEO Bernard Arnault, will gain an 8.5% stake in Hermes as a result of the distribution.
LVMH, its biggest shareholder Christian Dior and Arnault all agreed not to buy shares in Hermes for at least five years. Dior, which is controlled by Arnault, in turn owns just over 42% of LVMH.
"This will create an overhang in Hermes shares as there are going to be lots of LVMH and Christian Dior shareholders moving the stock on soon after they get it," said a Paris-based fund manager who asked not to be named. "It also removes the takeover speculation."
LVMH said it expected to complete the distribution of its Hermes shares by Dec. 20
LVMH in October 2010 stunned family controlled Hermes and regulators when it announced that it owned just over 17% of its smaller rival. LVMH's Arnault insisted that the holding was friendly, but he failed to soothe the concerns of Hermes controlling family. They hurriedly established a holding company that locked in a 50.2% stake in the Birkin bag maker and launched legal action to force LVMH to sell its stake.
LVMH, which later increased its stake in Hermes to 23.1%, also fell foul of regulators. It was fined 8 million euros for failing to disclose its stake building. LVMH would normally have needed to declare its holding once it passed 5%, but used swap deals with three banks, each of which held less than 5% in Hermes, to avoid revealing its holding. The maneuver was ruled to have broken the spirit, though not the letter, of the law and led to a re-writing of French disclosure rules to close the loophole.
Hermes in June 2013 filed a suit asking a Paris commercial court to annul the acquisition of the initial 17.1% stake, describing it as "the biggest fraud" in French stock market history. That came on top of earlier filings alleging criminal insider trading by LVMH. LVMH countersued for slander and sought compensation for "serious harm" caused by Hermes' "baseless legal proceedings."
Peace broke out after the president of the Commercial Court of Paris, where at least some of the cases were due to be heard, proposed the solution agreed by the two companies.