UPDATE 3-Louis Vuitton owner faces maximum fine in luxury row
* 10 mln euro fine publicity blow for LVMH
* AMF says LVMH should have disclosed size of stake
* Enquiry reveals LVMH eyed Hermes control in 2007-2008 (Adds details of)
By Astrid Wendlandt and Pascale Denis
PARIS, May 31 (Reuters) - A battle between French luxury handbag makers spilled out into the public eye on Friday with market regulators seeking the maximum fine for Louis Vuitton owner LVMH for failing to disclose moves to build a stake in rival Hermes.
The row centres around deals, first disclosed in late 2010, by LVMH owner and France's wealthiest man Bernard Arnault that have left the firm with a roughly one fifth stake in its biggest rival, the producer of the iconic Kelly and Birkin handbags.
Arnault, who has built LVMH by steadily acquiring other brands over the last decade, says he is happy to remain a long-term shareholder while some industry observers say he may be playing a long game in the hope of someday convincing Hermes' family owners to sell out.
Hermes owners have fought tooth and nail against Arnault, however, since discovering LVMH had built up an initial 14 percent stake.
Regulator AMF said on Friday that LVMH's dealings regarding its stake building in Hermes were opaque and represented grave misconduct which could even be regarded as "fraudulent behaviour".
LVMH, which now owns 22.6 percent of Hermes, surprised the stock market in October 2010 when it announced it had a 14 percent stake, gained partly via derivatives that allowed it to not declare its holding.
The AMF said LVMH should have disclosed in its accounts the size of its exposure to Hermes shares through equity derivatives acquired in 2008 as well as the fact it had a Hermes stake of just under 5 percent acquired in 2001 and 2002.
In France, companies are required to disclose when they take a stake worth more than 5, 10 and 15 percent of a another company's capital if the target is listed on the stock market.
Hermes is also challenging LVMH's stake building in a separate court procedure. The AMF finding will not have any impact on the court case, but still represents a boost to Hermes' case.
The amount of the fine, 10 million euros ($13.05 million), is small change for a group whose market value is around 70 billion euros but the regulator's decision is a public relations setback for Arnault, who owns some 60 luxury brands.
Arnault owns Louis Vuitton, the world's biggest luxury brand in terms of revenues, together with a string of fine wine and spirits makers including Hennessy cognac and Moet & Chandon champagne.
He has built the group into a global powerhouse in the space of 15 years by acquiring brands including Guerlain and Chateau d'Yquem. Hermes' own spectacular growth into a brand worth over 3 billion euros in annual sales has wetted his appetite.
The hearing revealed that the world's biggest luxury group had as early as 2007 and 2008 mandated Lazard and Rothschild bankers to look into the possibility of acquiring control of Hermes and strike an alliance with some family shareholders.
Since making public its Hermes holding, LVMH has consistently denied seeking control of Hermes and denied any wrongdoing in terms of financial disclosure and transparency.
Hermes is controlled by three families, the Puech, the Dumas and Guerrand who together represent more than 75 descendents of Emile Hermes who founded the company in 1837 as a harness and saddle maker.
They responded to LVMH's stake build-up by creating a holding that controls 51 percent of the company though the AMF's inquiry also disclosed that the biggest Hermes family shareholder Nicolas Puech had sold some of his shares to LMVH.
That puts into question Hermes' public assertion that the family was united in the battle against LVMH.
Earlier on Friday, the AMF said it would look into LVMH's call for the judicial process to be made invalid but it would not halt the process. The AMF's sanctions committee is due to respond within a matter of weeks to the regulator's findings and proposed fine.
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