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Bernard Arnault wants to simplify his holdings of Dior and LVMH, but his proposal is looking shabby  

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

Bernad ArnaultBernard 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 EUR 260 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.

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 EUR 14 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 Arnault’s model and Dior is worth EUR 293 a share, while his offer is worth just EUR 257—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 EUR 6.5 billion.

Some of the price moves since 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 Arnault.

Dior

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 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. 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.

www.wsj.com