Billionaire's Offer For Christian Dior Needs a New Look -- Heard on the Street
15 May 2017 - 7:35PM
Dow Jones News
By Stephen Wilmot
France's richest man may need to dig deeper into his pocket if
he wants to straighten out his tangle of shareholdings in luxury
leaders LVMH and Christian Dior.
Bernard Arnault announced last month that he wanted to buy out
minority shareholders in Christian Dior, the listed entity through
which he owns most of his stake in LVMH. He would pay what he said
was Dior's book value of EUR260 a share, in a mixture of cash and
shares in a third luxury company whose shares he owns, Hermès.
But if the offer was ever pitched at book value, it no longer
is.
Mr. Arnault used different methodologies for valuing Dior's 41%
stake in LVMH, which accounts for most of the company's book value,
and his own stake in Hermès, which accounts for about a third of
the offer package. The Dior stake in LVMH was valued using
one-month and three-month average share prices, while the Hermès
stake was valued using the last available price. Since luxury
shares have rebounded very strongly year-to-date, the inconsistency
had the effect of understating Dior's book value by about EUR14 a
share.
The other problem is that LVMH shares have risen about 8% since
the deal was announced, while Hermès shares have fallen 4%. Plug
the latest share prices into Mr. Arnault's model and Dior is worth
EUR293 a share, while his offer is worth just EUR257--a 12%
discount. The billionaire essentially wants to buy Christian Dior's
fashion house, which is the company's only other asset, for free,
only to sell it on to LVMH for EUR6.5 billion.
Some of the price moves since Mr. Arnault's offer may be
self-fulfilling. Dior shareholders, instead of waiting for the
tender, have probably rotated into LVMH shares, boosting their
value. They may have also sold Hermès shares, anticipating that
they will receive fresh ones from Mr. Arnault.
Still, Dior's shareholders have little to gain from selling out
at a 12% discount to book. In the month before the announcement the
Dior discount to book value as implied by LVMH's stock price
averaged 15%, calculates brokerage Bernstein. If Mr. Arnault wants
the Dior minorities, he will probably have to offer more for
them.
Of course, he might choose to walk away instead. Dior shares
would then likely fall in rhythm with LVMH's, which have also been
buoyed by the earnings-boosting prospect of integrating the Dior
fashion house. But this risk can be covered by a short position in
LVMH stock. A stake in Dior would then amount to a pure bet that
the discount between the companies' valuations will close.
This seems a reasonable bet to make. Mr. Arnault has made clear
he wants to simplify his empire, yet the discount remains almost as
wide as it was before. That can't last.
Write to Stephen Wilmot at stephen.wilmot@wsj.com
(END) Dow Jones Newswires
May 15, 2017 05:20 ET (09:20 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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