PARIS French luxury goods company LVMH's surprise acquisition of 17.1 percent of rival Hermes at a major discount to recent market levels will be investigated by the local market regulator.
Hermes, known for leather goods and scarves, said on Monday it had not been aware of LVMH's stakebuilding, adding the controlling Hermes family shareholders still held a near 75 percent stake and pledged to remain committed to the company.
LVMH, home to Louis Vuitton and Moet champagne, had said on Saturday it did not plan a takeover but wanted to be a long-term investor when announcing it owned 14.2 percent of Hermes and had derivatives allowing it to bring that to 17.1 percent.
LVMH said on Monday transactions related to its Hermes holding complied with all market disclosure rules and it would file "appropriate notifications within the timeframe laid down by the market regulator, the AMF."
Hermes shares rose 18 percent to an all-time high of 207.75 euros, before easing back to 204.00 euros at 1500 GMT when LVMH stock was up 2.5 percent.
Hermes deputy chief executive Patrick Albaladejo said the company was only told of LVMH's stakebuilding an hour before Saturday's statement. "We were very surprised," he said.
It was not clear how LVMH bought its holding at an average price of 80.5 euros, a 54 percent discount to Friday's closing price of 176.2 euros.
"Nobody knows where LVMH bought the shares from or when. Hermes has not been trading around 80 euros for about 18 months. We are most eager to see the disclosure," a hedge fund manager said.
Another said theories included the suggestion LVMH "bought a small stake below the disclosure threshold when the stock was trading around 80 euros and then took options to build up the stake at a later date. That is the most plausible account."
Scilla Huang Sun, manager of the $70 million Julius Baer luxury brands fund in Zurich said: "I think LVMH want to have first mover advantage in case anybody get a chance to make a bid. Hermes is probably the world's most desirable brand ... and it is a well managed company, so it is a good investment."
AMF TO VERIFY LVMH DISCLOSURES
French market regulator AMF said it would verify that rules relating to stake thresholds were respected when LVMH built up its stake.
Meanwhile, the French association of small shareholders Adam said LVMH had not respected the rules by secretly building up its stake in Hermes.
"There has really been a bypassing of transparency rules which has to be dealt with by the regulator," Adam president Colette Neuville said. "There is no point in having threshold rules if one can bypass them."
An investor needs to inform the market it has acquired a stake or voting rights of more than 5 percent in a listed company and needs to clarify its intentions once that stake reaches 10 percent.
However, many instruments, such as options, allow investors to build up stakes without having to declare them.
LVMH, which will have to file its declaration to the AMF this week, said it fully supported Hermes's strategy and would not seek board representation. "This transaction possibly explains the stellar performance of Hermes shares this year (up 89 percent) and more specifically since May (up 76 percent) following the death of emblematic CEO Jean-Louis Dumas, its largest individual shareholder," Citi said in a note on Monday.
"In principle, we believe the combination of the highest margin and one of the best-run luxury brands and one of the most prestigious brands (Hermes) would be attractive, provided LVMH can contribute to the improvement of Hermes's profitability (27 percent consensus 2010 EBIT margin)."
Hermes said its long term control was guaranteed by its status as a French limited partnership, which made takeovers very difficult.
Hermes's status as a limited partnership, or "societe en commandite," is a corporate structure that concentrates power in the hands of a ruling committee controlled by the family.
For example, the bylaws allow Hermes to issue new shares to existing shareholders in case of a hostile bid and also give shareholders who have owned shares for more than four years a double vote.
(Additional reporting by Victoria Howley in London; Editing by Erica Billingham and Dan Lalor)