PARIS Hermes has long been famous for persuading shoppers to fork out over $5,000 (3,000 pounds) for hand crafted fashion icons like its Birkin bag. Now it's the price tag on its shares that is raising eyebrows.
Hermes (HRMS.PA) stock hit a new seven-month high this week -- the highest level since it spiked above 200 euros a share after French billionaire Bernard Arnault shocked the luxury world by scooping up 20 percent of its stock.
The 174-year old family-owned company is trading at 35 times 2012 earnings, the top in the European sector .SXQP and besting even the multiple of Italy's Bulgari BULG.MI, which Arnault's champagne to leather goods empire LVMH (LVMH.PA) agreed to buy in March at a 60 percent premium.
An LVMH spokesman declined to comment, but some investors and bankers wonder whether Arnault, never one to be easily dissuaded from a target once he has settled on it, could again be buying more Hermes shares from the 7 percent free float that remains after his initial moves.
"It could very well be that he's trying to buy out the other 7 pct that's in the float," said one Paris-based banker. "He's sort of the only buyer. If ever someone sells, they will sell to him. It's as simple as that."
LVMH, which surreptitiously built up a stake in Hermes starting in 2008 and revealed its move last autumn, has long courted Hermes but repeatedly denied it would like to add the brand to its empire.
The share's rally has pushed Hermes' market capitalisation to 20 billion euros, making it more valuable than French blue chips such as tyre maker Michelin (MICP.PA) and EADS EAD.PA, parent of the world's biggest commercial aircraft maker Airbus.
The world's biggest luxury group last week said it wished to remain a long-term shareholder of Hermes, rejecting a call by Hermes Chairman Bernard Puech to halve its stake.
Now the question is whether LVMH is flagrantly scooping up more shares, or whether the recent surge in Hermes stock -- which is up 21 percent so far this year -- represents a bet by third parties on further moves by Arnault or the Hermes group.
"The Hermes family is doing all it can to avoid falling into the hands of another group, which means a white knight such as a hedge fund could be welcomed," said Marc Gilson, head of Paris-based fund manager Fival, which does not hold Hermes or LVMH shares in portfolios.
"That sort of speculation is fuelling the stock's rally, which makes a potential squeeze out of the remaining shares, or even an offer to some or all members of the family, more and more expensive."
A squeeze-out of minorities by the Hermes controlling family, which is preparing itself to set up a holding company controlling more than 50 percent of the luxury goods maker, is also a possibility, although the Paris-based banker noted that such a move would be a late one given Arnault's stakebuilding.
"The harm has been done," he said. "They had publicly listed shares and they've been acquired by Arnault."
Hermes first listed in 1993 as a way for family shareholders to exchange shares more easily without having to hire consultants and lawyers each time.
Trading volumes on Hermes stock have been rising in the past few weeks, with May volumes twice as high as April. They remain relatively low however, with daily volumes representing only about 1.3 percent of the float.
WHITE OR BLACK KNIGHT?
Those thin volumes could mean that rational investors are reluctant to wager on a stock whose valuation -- despite a 26 percent jump in first-quarter sales -- is widely seen as divorced from fundamentals.
But it could also mean that fresh buying by Arnault has further shrunk the company's float.
The next threshold at which Arnault would have to disclose an increase in his Hermes stake is 25 percent.
"The risk for Hermes in seeking a white knight is that the black knight is in fact hidden behind a white knight," Gilson said.
"Let's not forget that LVMH's stake building in Hermes was done using a vast number of investment vehicles. The Hermes family really needs to know who are its true friends."
Known for prioritising long-term growth, Hermes managed to increase sales during the 2009 downturn and is now enjoying one of the fastest growth rates in the industry.
One Paris-based sales trader noted that Hermes, which catered to European royal families and Parisian high society, tends to defy the market's usual laws of gravity for the same reason Arnault -- who already owns brands from Louis Vuitton to Christian Dior perfumes -- covets it.
"Hermes is really a unique case," he said. "You're in a valuation world where things are priceless -- it's like Maserati or Ferrari."
(Additional reporting by Astrid Wendlandt, Raoul Sachs, Alexandre Boksenbaum-Granier and Pascale Denis; Editing by David Cowell)