PARIS - A long and bitter battle that has gripped the luxury goods industry and pitted two of France's richest families against each other came to an unexpected end on Wednesday when LVMH and Hermes agreed to a truce.
Under the deal, LVMH - the world's No.1 luxury group, controlled by France's wealthiest man Bernard Arnault - agreed to relinquish most of its 23.2 per cent stake in Hermes and not acquire any shares in its smaller rival for five years.
It effectively buried the possibility LVMH could make a full takeover bid for the 177-year-old maker of Birkin and Kelly handbags. Such a prospect had boosted Hermes's stock, which has been trading at a price-to-earnings ratios of about 30 times in recent years, a 70 per cent premium to the industry average.
Shares in Hermes fell nearly 10 per cent to 236.5 euros in early trading on Wednesday, wiping out 2.8 billion euros ($3.7 billion) off its market value - equivalent to around 350,000 Birkin handbags based on an average price of 8,000 euros. By market close, they were down 3.5 per cent.
"The speculative premium has disappeared," said Barclays France director Franklin Pichard.
The deal, under which LVMH agreed to redistribute its stake in Hermes to its shareholders, ends four years of legal warfare between the luxury titans, dubbed the "handbag war" by the press.
In 2010 LVMH - whose brands include fashion labels Christian Dior and Louis Vuitton, Hennessy cognac and Dom Perignon champagne - revealed it had built up a 17 per cent stake in Hermes. It made the investment through a series of equity derivatives instead of straightforward share purchases, which prevented it from having to declaring them.
Hermes, one of France's last major independent luxury group still controlled by the founding family, vehemently protested at having its arch-rival as its biggest external shareholder.
According to French magazine Challenge, the Hermes family is Frances's fourth richest with a fortune estimated at nearly 19 billion euros, behind LVMH's Arnaults - estimated at 27 billion euros, L'Oreal's Bettencourts and Auchan's Mulliez. They come just ahead of Chanel's Wertheimer brothers.
Arnault had long set his sights on Hermes as it is considered one of the luxury brands that best resists downturns, with its products increasingly regarded as investments and benefiting from a thriving second-hand market.
While the sales growth of rival mega-brands such as Gucci and Louis Vuitton have ground to a halt in the past year, Hermes has continued to enjoy an annual revenue rise of more than 10 per cent, consistently higher than the industry average.
The deal marks the first time Arnault - whose LVMH group has gobbled up more than 60 brands in the past two decades, including sizeable ones such as Roman jeweler Bulgari - abandons the pursuit of a prized target.
But the truce nevertheless offers a profitable solution for LVMH, which began building up its stake in Hermes in 2007 and 2008. It stands to make a theoretical gain on its holding of around 3 billion euros, analysts estimated.
"This clears up the situation and it is one of the few divorces in which both the partners are winners," said Mario Ortelli, luxury goods analyst at Bernstein.
Groupe Arnault, the family holding company of LVMH, will own 8.5 per cent of Hermes after the share distribution.