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| LVMH-Hermès Dispute at a Boil | LVMH-Hermès Dispute at a Boil |
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| PARIS — The long and bitter fight between the fashion mogul Bernard Arnault and the Hermès luxury house, which has transfixed the French business world, is nearing a moment of decision. | PARIS — The long and bitter fight between the fashion mogul Bernard Arnault and the Hermès luxury house, which has transfixed the French business world, is nearing a moment of decision. |
| French securities regulators are set on Friday to lay out their case, the fruit of an inquiry of more than two years. They contend that Mr. Arnault worked by stealth, for more than a decade, in an unsuccessful attempt to muscle in on his smaller rival, adding more than $2 billion to his fortune in the process. | French securities regulators are set on Friday to lay out their case, the fruit of an inquiry of more than two years. They contend that Mr. Arnault worked by stealth, for more than a decade, in an unsuccessful attempt to muscle in on his smaller rival, adding more than $2 billion to his fortune in the process. |
| Mr. Arnault, 64, now has more than one-fifth of Hermès’s shares and has denied any wrongdoing. Through his company, LVMH Moët Hennessy Louis Vuitton, he declined to comment. | Mr. Arnault, 64, now has more than one-fifth of Hermès’s shares and has denied any wrongdoing. Through his company, LVMH Moët Hennessy Louis Vuitton, he declined to comment. |
| Under French law, the regulators cannot force him to disgorge his Hermès holdings, and the largest fine he could face is 10 million euros, or $13 million. France’s richest man, Mr. Arnault is worth $29 billion, according to Forbes magazine, and he controls LVMH through his investment vehicle, Groupe Arnault. | Under French law, the regulators cannot force him to disgorge his Hermès holdings, and the largest fine he could face is 10 million euros, or $13 million. France’s richest man, Mr. Arnault is worth $29 billion, according to Forbes magazine, and he controls LVMH through his investment vehicle, Groupe Arnault. |
| Hermès is the last great prize among the independent European fashion houses, after two decades of industry consolidation led by magnates like Mr. Arnault and the PPR-Kering boss François-Henri Pinault. | Hermès is the last great prize among the independent European fashion houses, after two decades of industry consolidation led by magnates like Mr. Arnault and the PPR-Kering boss François-Henri Pinault. |
| Mr. Arnault, the architect of LVMH’s rise to No.1 in the world of luxury, has denied conniving to amass the Hermès International shares. | Mr. Arnault, the architect of LVMH’s rise to No.1 in the world of luxury, has denied conniving to amass the Hermès International shares. |
| “We never expected to be shareholders in Hermès,” he said at an LVMH shareholders’ meeting on April 18. “We made a financial investment, and it worked out in a manner that we hadn’t anticipated.” | “We never expected to be shareholders in Hermès,” he said at an LVMH shareholders’ meeting on April 18. “We made a financial investment, and it worked out in a manner that we hadn’t anticipated.” |
| But the regulator, the Financial Markets Authority, is expected to argue on Friday that LVMH carefully planned and executed the accumulation of Hermès shares more than a decade ago in a manner that disguised Mr. Arnault’s involvement until Oct. 23, 2010. | But the regulator, the Financial Markets Authority, is expected to argue on Friday that LVMH carefully planned and executed the accumulation of Hermès shares more than a decade ago in a manner that disguised Mr. Arnault’s involvement until Oct. 23, 2010. |
| That is the day he shocked Hermès and the financial world with the announcement that he owned a 14.2 percent stake and was taking it to 17.1 percent. (He has since raised it to 22.3 percent.) | That is the day he shocked Hermès and the financial world with the announcement that he owned a 14.2 percent stake and was taking it to 17.1 percent. (He has since raised it to 22.3 percent.) |
| According to a report from the regulators that was obtained by the French newspaper Le Monde, LVMH used top investment banks and law firms to devise its strategy. Regulators also say it used tax havens and complicated financial structures to hide its footprints. | According to a report from the regulators that was obtained by the French newspaper Le Monde, LVMH used top investment banks and law firms to devise its strategy. Regulators also say it used tax havens and complicated financial structures to hide its footprints. |
| Le Monde reported on May 18 that the inquiry had concluded that LVMH’s complicated maneuvering made sense only if the intention was to take a significant stake in Hermès. | Le Monde reported on May 18 that the inquiry had concluded that LVMH’s complicated maneuvering made sense only if the intention was to take a significant stake in Hermès. |
| Responding to a request for comment, LVMH referred to the statement it made to Le Monde, saying the company “vigorously contests the conclusions of the report.” It also decried the leaking of the report to Le Monde, noting that, by law, the results of such investigations must be kept secret. And it expressed confidence that it would be cleared of any wrongdoing. | Responding to a request for comment, LVMH referred to the statement it made to Le Monde, saying the company “vigorously contests the conclusions of the report.” It also decried the leaking of the report to Le Monde, noting that, by law, the results of such investigations must be kept secret. And it expressed confidence that it would be cleared of any wrongdoing. |
| An LVMH spokesman also said that the company’s defense would be laid out at the hearing on Friday. | An LVMH spokesman also said that the company’s defense would be laid out at the hearing on Friday. |
| Anne-France Malrieu, a spokeswoman for the family group that controls Hermès, declined to comment, as did Florence Gaubert, a spokeswoman for the market regulator. | Anne-France Malrieu, a spokeswoman for the family group that controls Hermès, declined to comment, as did Florence Gaubert, a spokeswoman for the market regulator. |
| Hermès, founded in Paris in 1837, is famed for its silk scarves, leather handbags and clothing. It is also highly profitable, generating net profit of 740 million euros last year, up 25 percent from 2011, on revenue of 3.5 billion euros, up 23 percent. But those results are dwarfed by those of LVMH, which had net profit of 3.4 billion euros last year on sales of 28.1 billion euros. | Hermès, founded in Paris in 1837, is famed for its silk scarves, leather handbags and clothing. It is also highly profitable, generating net profit of 740 million euros last year, up 25 percent from 2011, on revenue of 3.5 billion euros, up 23 percent. But those results are dwarfed by those of LVMH, which had net profit of 3.4 billion euros last year on sales of 28.1 billion euros. |
| Beginning in 2001 or 2002, the investigators say, LVMH obtained 4.9 percent of Hermès’s shares through affiliates based in tax havens, just below the 5 percent threshold that would require disclosing the stake under securities regulations. The company then buried that information in its financial reports under misleading rubrics, “in violation of international norms,” Le Monde reported, citing the report. | Beginning in 2001 or 2002, the investigators say, LVMH obtained 4.9 percent of Hermès’s shares through affiliates based in tax havens, just below the 5 percent threshold that would require disclosing the stake under securities regulations. The company then buried that information in its financial reports under misleading rubrics, “in violation of international norms,” Le Monde reported, citing the report. |
| In 2006, the investigators say, Mr. Arnault began working with his lawyers and the investment bank Rothschild on a plan to win outright control. LVMH started building a position in Hermès stock using financial instruments that can be paid out either in cash or in the underlying shares, the report said. These equity swaps are an opaque form of derivatives. | In 2006, the investigators say, Mr. Arnault began working with his lawyers and the investment bank Rothschild on a plan to win outright control. LVMH started building a position in Hermès stock using financial instruments that can be paid out either in cash or in the underlying shares, the report said. These equity swaps are an opaque form of derivatives. |
| According to the regulators, Le Monde reported, this technique had “the useful effect of not giving any clear or individualized information on the equity swaps and rendering them undetectable by the public.” | According to the regulators, Le Monde reported, this technique had “the useful effect of not giving any clear or individualized information on the equity swaps and rendering them undetectable by the public.” |
| After the 2010 death of Jean-Louis Dumas, the legendary Hermès family leader, Mr. Arnault began taking a more aggressive approach, according to the investigators. Where he had once asked his banks to pay the gains on his derivative bets in cash, he now demanded that they pay him in stock. When they did, according to the report, Mr. Arnault, without ever having publicly hinted at the position he was building, suddenly became Hermès’s largest shareholder. | After the 2010 death of Jean-Louis Dumas, the legendary Hermès family leader, Mr. Arnault began taking a more aggressive approach, according to the investigators. Where he had once asked his banks to pay the gains on his derivative bets in cash, he now demanded that they pay him in stock. When they did, according to the report, Mr. Arnault, without ever having publicly hinted at the position he was building, suddenly became Hermès’s largest shareholder. |
| The announcement of that fact enraged Hermès. | The announcement of that fact enraged Hermès. |
| “We got a stab in the back,” as Patrick Thomas, one of Hermès’s co-chief executives, later said. | “We got a stab in the back,” as Patrick Thomas, one of Hermès’s co-chief executives, later said. |
| Faced with that shock, the Hermès family — the Dumases, the Puechs and the Guerrands — responded by creating a joint holding that effectively locked up more than half the shares, ensuring that Mr. Arnault could not seize control. Today, between the family holdings and Mr. Arnault’s stake, only a small portion of Hermès’s stock is actually available for trading on the market. | Faced with that shock, the Hermès family — the Dumases, the Puechs and the Guerrands — responded by creating a joint holding that effectively locked up more than half the shares, ensuring that Mr. Arnault could not seize control. Today, between the family holdings and Mr. Arnault’s stake, only a small portion of Hermès’s stock is actually available for trading on the market. |
| Despite the family’s repeated calls for Mr. Arnault to sell most of his holding, he has refused to do so. He maintains that his is a strategic, long-term investment, and he has not sought a seat on the board. | Despite the family’s repeated calls for Mr. Arnault to sell most of his holding, he has refused to do so. He maintains that his is a strategic, long-term investment, and he has not sought a seat on the board. |
| Armando Branchini, a luxury sector consultant at InterCorporate in Milan, described Mr. Arnault’s Hermès move as “a kind of alternative bet.” | Armando Branchini, a luxury sector consultant at InterCorporate in Milan, described Mr. Arnault’s Hermès move as “a kind of alternative bet.” |
| “He put money where it was profitable to do so,” Mr. Branchini said. “And who knows? He gets his foot in the door, and if the family members decide to sell later on, he’s in position to take advantage of that.” | “He put money where it was profitable to do so,” Mr. Branchini said. “And who knows? He gets his foot in the door, and if the family members decide to sell later on, he’s in position to take advantage of that.” |
| The investigators’ report offers a clue about where Mr. Arnault’s banks obtained at least some of the Hermès shares they obtained for his stake. Nicolas Puech, a cousin of Mr. Dumas and the family’s largest single shareholder, with a 5.7 percent stake, sold 8.8 million shares to Mr. Arnault’s banks for the equity swaps, according to the investigators, as reported by Le Monde. | The investigators’ report offers a clue about where Mr. Arnault’s banks obtained at least some of the Hermès shares they obtained for his stake. Nicolas Puech, a cousin of Mr. Dumas and the family’s largest single shareholder, with a 5.7 percent stake, sold 8.8 million shares to Mr. Arnault’s banks for the equity swaps, according to the investigators, as reported by Le Monde. |
| But the regulators said their investigation ran into a roadblock with Mr. Puech, because of “an absence of satisfactory cooperation.” Mr. Puech, who in March was estimated by Forbes to have a net worth of $2.1 billion, has reportedly denied to the family that he sold the shares. He declined to comment for this article. | But the regulators said their investigation ran into a roadblock with Mr. Puech, because of “an absence of satisfactory cooperation.” Mr. Puech, who in March was estimated by Forbes to have a net worth of $2.1 billion, has reportedly denied to the family that he sold the shares. He declined to comment for this article. |
| At the public hearing Friday, the market regulator’s enforcement committee will hear evidence from both sides and decide whether to call for sanctions. The decision is expected to be posted on the agency’s Web site within a few weeks. If LVMH is sanctioned, it can appeal. | At the public hearing Friday, the market regulator’s enforcement committee will hear evidence from both sides and decide whether to call for sanctions. The decision is expected to be posted on the agency’s Web site within a few weeks. If LVMH is sanctioned, it can appeal. |
| Mr. Arnault’s investment has already paid off handsomely. He bought most of his Hermès stock when it was trading at 85 euros; on Wednesday, it closed at 277.95 euros, leaving him with a paper gain of about 2 billion euros. | Mr. Arnault’s investment has already paid off handsomely. He bought most of his Hermès stock when it was trading at 85 euros; on Wednesday, it closed at 277.95 euros, leaving him with a paper gain of about 2 billion euros. |
| Financially speaking, in other words, even if Mr. Arnault loses with the regulator, it appears he has already won. |