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October 28, 2010 5:39 PM

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Decoding the LVMH Stake in Hermes

You practically need an M.B.A. and a law degree to fully understand the complex financial machinations luxury titan Bernard Arnault employed over a two-year period to arrive at a surprising 17.1 percent stake in Hermes International....

You practically need an M.B.A. and a law degree to fully understand the complex financial machinations luxury titan Bernard Arnault employed over a two-year period to arrive at a surprising 17.1 percent stake in Hermes International. But even a layman can appreciate what a formidable strategist Arnault is to get a foot in the door of a treasured -- and seemingly impenetrable -- family-controlled firm.

"Canny" and even "cheeky" are some of the terms being bandied about in power-lunch spots here to describe -- in admiring tones -- the stealth operation. It's the talk of the town. Last Thursday, LVMH Moet Hennessy Louis Vuitton told the French market regulator that it achieved the Hermes stake through several cash-settle equity swaps -- in which an investor essentially bets on the future value of a stock without actually owning the underlying shares.

In a research note, Citi analyst Thomas Chauvet explained that LVMH bought 12.8 million Hermes shares via equity swap contracts in early 2008, when Hermes shares were trading in the range of 62 to 107 euros. 

(Last week, they spiked to more than 200 euros.) LVMH's filing also suggests it also owned about 4.9 percent of Hermes, just under the declaration threshold of 5 percent. Its equity-swap contracts were unwound on Oct. 21 and 24 with the physical delivery of the shares.

Frederic Godart, a researcher and professor at INSEAD, a top business school, described the LVMH move as a "preemptive strike" on a prized heritage brand, positioning the French luxury giant ahead of other interested parties.

He noted that other luxury conglomerates, Compagnie Financiyre Richemont and PPR, may well have had their sights on Hermes, or perhaps a powerful Chinese group. But Arnault got there first -- and with a two-year head start.

In Godart's estimation, LVMH's swoop may spur other deals in the sector, and is certainly a wake-up call to its luxury rivals.

What's more, Godart said he's also keeping an eye on the fast-fashion behemoths -- Spain's Inditex and Sweden's Hennes & Mauritz. Given their juggernaut status -- and ever-more frequent dalliances with designers -- he said he wouldn't be surprised by a move into luxury as their next step.

As last week's events reminded us, deals can come out of left field.
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