Diageo deal could smooth way for LVMH takeover of Hermès

WHEN France's richest man, Bernard Arnault, sinks his teeth into something, he rarely lets go. The head of luxury empire LVMH may have a reputation for obsessing about the frivolous - no-carb diets and Dior's latest handbag collection - but when it comes to business, few come as dogged or as determined as him. In 2004 Arnault beat off competition from Pernod Ricard and Bacardi to get his hands on Scotland's Glenmorangie.

But his history of upsetting the corporate applecart dates back even further to the late eighties, when the well-tailored 61-year-old risked open warfare with the upper echelons of Parisian society over the manner in which he seized control of LVMH - first ridding the company of the Mot Hennessy (MH) clan and then ousting the 76-year-old chairman of Louis Vuitton, Henry Racamier.

So when news broke last week that LVMH had built up a 17.1 per cent stake in Herms, the elite Parisian fashion house, it was no wonder that brokers began to question if Arnault was up to his old tricks again.

Eyebrows were immediately raised when LVMH chose a Saturday afternoon - when most Parisian traders were already safely ensconced in their country retreats - to release a statement revealing that it had acquired a 14.2 per cent stake in Herms and could increase this holding to 17.1 per cent through derivatives.Immediately BlackBerries on both sides of the channel started ringing off the hook as suspicions grew that Arnault was planning a full takeover attempt for Herms, which for decades has been carefully guarded by the Dumas family.

Diageo's name entered the fray last Sunday morning. Some concluded that LVMH would be forced to sell its drinks operation MH to Diageo, allowing the latter's chief executive Paul Walsh to get his hands on brands such as Krug, Dom Prignon and Glenmorangie - a desire he has made no secret of in the past.

As one source at Diageo said: "It would be a good strategic fit for us if the price was right."

Although LVMH stated it had "no intention" of launching a full takeover bid for Herms, nor would it seek board representation, the rumours intensified on Wednesday when it was revealed that Arnault had seized the stake by stealth, using a complicated system of equity swaps.

LVMH added further fuel to the fire when it added that it "envisages to pursue, where appropriate, its purchases of Herms International shares, according to market conditions".

The extended Dumas family, whose 40-50 members collectively control Herms following the death of its patriarch Jean-Louis Dumas in May, has put on a united front against Arnault, stating that his swoop on the firm was "unsolicited".But Anne Marie Davis, lead analyst at Verdict Research, believes it's unlikely both the Paris Bourse and the City has heard the last of the LVMH/Herms/Diageo tussle yet.

Although Arnault will have to go on a major charm offensive to win over family members, she believes a deal could be done further down the line.

"Over time, absolutely it would be possible for something to happen there but not overnight. They (LVMH and Herms] do fit really well but Herms has a deep-rooted belief in the brand and quality."

There is uncertainty over whether Diageo will get a look in any future deal and Nico Lambrechts of Bank of America Merrill Lynch argues LVMH would not have to sell its drinks arm in order to fund a takeover of Herms. But brokers are keeping a keen eye on the luxury goods sector.

A string of high-end brands have recently reported booming sales.and Verdict Research, which will shortly put out its influential report on the luxury goods sector, expects this growth to continue as shoppers in China in particular continue to shell out for high end branded clothes and leather goods.

"A lot of brands like Burberry are buying back their franchise operations in China because they are doing so well. Sales from that part of the world really are strong," it said.

Luxury retailers are also jumping on the e-commerce bandwagon after netaporter.com, the designer online retailer founded by former fashion journalist Natalie Massenet proved shoppers were willing to part with thousands over the internet.

During the recession, luxury retailers Tiffany and Bulgari were named as potential takeover targets in the luxury sector but with management surrounding these firms often as private and as exclusive as the goods they sell, the speculation came to nothing.

But few in the City and the Paris Bourse are unwilling to write off further tussles in the sector yet.

As one investment banker concluded: "Diageo and Mot Hennessy is a deal made in heaven. It ticks all the essential boxes but will Arnault play ball?"