The transaction “will allow the simplification of the structures, long requested by the market, and the strengthening of LVMH’s Fashion and Leather Goods division”. The French king of the luxury goods realm has announced he will combine the Christian Dior fashion brand with LVMH to simplify the business structure and boost LVMH’s earnings.
DEAL RATIONALE
The deal rationale is rather straight forward. On a one hand, the deal would simplify a complex corporate structure involving the family holding company Groupe Arnault, LVMH and Christian Dior. Interestingly, the Arnault family owns 74.1% of Christian Dior SE (this translates into almost 85% of voting rights) which controls 41% of LVMH.
In addition, Dior owns 100% of Christian Dior Couture. One of the many implication of such a structure is the missed opportunity for LVMH’s minority shareholders to get exposure to Dior’s which reported sales of $1.9 billion and a profit of €252 million. Hence, a simpler structure could benefit such shareholders. In this way the whole Dior’s business would be under the LVMH corporate roof. In fact, LVMH already owns Dior’s cosmetic and fragrance business.
On the other hand, the acquisition of Christian Dior Couture would strengthen the Fashion & Leather Goods division. This sector has seen a downturn because of a slowdown in consumer spending and the negative effects on European tourism caused by recent terrorist attacks. However, the sector has rebounded from the aforementioned conditions. According to Groupe Arnault, Christian Dior Couture has an enterprise value of €6.5bn.
Additionally, the timing of this deal may have been influenced by the results of the French Presidential elections. At the time of the announcement, the markets were indeed expecting Emmanuel Macron to win the elections. The new president is perceived as market-friendly and has promised to cut corporate tax to 25% from 33.3%.
TERMS AND STRUCTURE
The Arnault Family Group, through Semyrhamis an entity that holds Christian Dior shares, informed the Board of Directors of Christian Dior of its intention to file a public offer for all the shares not currently held. The transaction can be divided into three parts and is the following:
- Primary mixed offer: €172 and 0.192 Hermès shares for each Christian Dior share;
- Secondary cash offer: €260 for each Christian Dior share; and
- Secondary exchange offer: 0.566 Hermès shares for each Christian Dior share.
The offer would primarily be mixed, but in order to provide greater flexibility it is completed by a secondary cash offer and a secondary exchange offer, with the limit of €8.0bn in cash and 8.9 million Hermès shares currently held by the Arnault Family Group.
It is worth noting that the offer values Christian Dior at its Net Asset Value and each share is valued €260, which represents a premium of 14.7% over the previous closing share price and 18.6% over the 1-month average share price. Moreover, the transaction will not only simplify the structure, but it is also expected to dilute the highly disputed stake that the the Arnault Family Group has amassed in Hermès via equity swaps and this represents the very end of the siege.
INDUSTRY OVERVIEW
The rise in globalization has created tremendous flows of goods, capital, and opportunities in the luxury goods market, resulting in positive growth over the past few years and making the luxury goods market one of the most competitive markets in the world. According to Bain and Company, the overall global luxury goods industry has posted steady growth of 4%, to an estimated €1.08 trillion in retail sales value in 2016. Luxury cars make the top performing segment (growing at 8%), followed by luxury hospitality (growing at 4%), and luxury dining. However, personal luxury goods, the market of the merging companies LVMH and Dior, essentially experienced plateaued growth. Macroeconomic factors such as Brexit, Trump, terrorism, and the French elections have created more uncertainty and decreased consumer confidence, resulting in a negative impact on personal luxury goods. Additionally, trends such as consumers starting to value experiences over stuff and the growth in the casual attire market has deteriorated the strong tailwinds in the market companies enjoyed several years ago.
In this market for personal luxury goods, companies must be proactive in delivering competitive results for shareholders. Management is focused on increasing profits and cutting costs through restructuring programs, mergers and acquisitions, implementing strategies to revitalize domestic demand, adapting to tourism flows, and optimizing sales channel to customer engagement. From 2017 to 2020, the market for personal luxury goods is expected to grow from 3% to 4% CAGR to approximately €280 billion (at constant exchange rates). Catalysts for growth include the rising Chinese middle class, which should continue to spur growth in luxury goods purchases, and a recovery of consumer confidence in developed markets from larger contributions from the millennials generation.
Finally, e-commerce will continue to challenge brick and mortar shops and companies with optimized digital channels with compete with a better position in the market. In order to succeed in the personal luxury goods market in the current competitive environment, companies will need to tailor their strategy to growth catalysts.
Sources and References: Press release: Project aiming at simplifying Christian Dior – LVMH Group structures, The Wall Street Journal, The Financial Times, CNN Money
To contact the authors:
Costantino Brizzi Costantino.Brizzi@studbocconi.it
Linda Du Linda.Du@studbocconi.it
Bocconi Students M&A Circle 