LVMH and Christian Dior: the dirty business of luxury goods
"Complete information and disclosure with regard to the group's structure and intra-group relations are a crucial pre-requisite to ensure that the functioning of groups remains compatible with the interests of shareholders and creditors at the different levels. The actual provisions of the Seventh Company Law Directive on consolidated accounts do not sufficiently address these concerns, in that consolidated figures do not reflect the financial situation of the various parts of the group and the degree of dependence of the subsidiaries on the parent company." Full text here:
The web of holding companies is the structure of choice for French industrialists (Bolloré holdings, Eurazeo holdings or Wendel). These were the brainchild of the French banking Godfather Antoine Bernheim. The Wendel families are still split over the manner in which the board members have constructed deals to allegedly act as personal cash cows at the expense of the family members and Wendel shareholders. In Pierre de Gasquet's book about Antoine Bernheim, he writes: "Historically this system of "Breton pullies" has at times been criticised in that it favours financial opacity of the groups in question, the debts of the companies at the top being often "transformed" into the resources of the entities lower down the structure". Uncovering such behaviour requires forensic analysis of the accounts of the multitude of subsidiaries and such analysis is not possible when accounts are not published and Christian Dior/ LVMH directors (who are also directors of the subsidiaries) hide behind the fact of them being private companies with no public disclosure requirements. LVMH states that it adheres to the MEDEF governance code that itself states: When a company is controlled by a majority shareholder (or a group of shareholders acting in concert), it assumes an appropriate responsibility with regard to other shareholders, direct and distinct from those of the board. It must particularly guard against possible conflicts of interest, be transparent in information supplied to the market and to take into account all interests equally.If LVMH and Dior directors consider that it is normal not to share information regarding the unquoted vehicles then we must assume that the activity of those groups has no bearing on the quoted vehicles. This is of course not the case and whether it be the sale of Cheval Blanc by Groupe Arnault to Eutrope (for over double the price that Albert Frère values it), or the purchase of Hermes shares using Sofidiv and 4 other companies, and the subsequent transfer from Sofidiv to LVMH fashion Group, then this information is necessarily of significant importance to LVMH and Christian Dior holders.
Price Waterhouse Coopers in 2009 commented, in relation to ECJ rulings that "the holding activities of a company, although passive activities, are naturally part of the real and genuine economic activity of a company or group of companies."
The capital gain on Hermes must be parked somewhere and whilst it does show up in the consolidated accounts, it would be nice to know where it is so that we can keep an eye on it to check it does not discreetly start drifting upwards. Numerous subsidiaries have smallish levels of authorised capital (Eley finance €200m, Sofidiv UK €227m to name but two), whilst others like Sofidiv stand at €8.4bn. Many of the companies seem to hold property that we might be assume is leased back to the group in the same way that Groupe Arnault itself does. The only thing that is clear is that nothing is clear and until the directors choose to be more transparent we are always going to have suspicions that they are not only conflicted, but also acting in a manner that looks after the controlling shareholders at the expense of the minorities. The very reason the complex structure was built, was not just to allow Bernaurd Arnault to control the maximum amount of the business with the smallest amount of capital, but also to construct an empire of mini holdings to shuffle money around. The latent discount of Dior compared to LVMH is of little consequence when accountants appear happy to value private equity in unquoted companies at an equivalent value to the non-discounted quoted equity. The Cheval Blanc deal is at least questionable (synergies and goodwill priced at more than the asset itself) but the more cash Mr Arnault has to find to continue to service his Carrefour debt, the more he will be under pressure to undertake more "transformation", to borrow Mr Gasquet's word.It is worth noting that unquoted Auchan is half the size of Carrefour but makes twice as much profit. The Mulliez family, who control the Auchan empire themselves are experts in constructing opaque holding structures, but with no quoted entities at all they can go further and deeper than Bernard Arnault. The Mulliezs are shy to say the least about annual account filings. They are based in the north near the Belgium border where they harbour numerous companies to benefit from tax advantages. Bernard Arnault himself was born in Croix, which so happens to be where the HQ of Auchan is based. The Mulliez family has a wealth that rivals or even surpasses his own, and it could be he was planning on applying the Auchan business model to Carrefour, make himself a healthy profit and at the same time strengthen competition against his rival. But the lost legal case on the tax advantage of Centre de Coordination Carrefour SNC demonstrates that this strategy has had serious set backs. Bernard Arnault has a history of using crisies to build up stakes. He started stakebuilding in LVMH itself using warrants after the 80's crash. If he could control Carrefour and entangle it in his web, there is no doubt he could extract significant value. The property assets alone account for much of the market capitalisation and a retail business structured in the Mulliez style, that Mr Arnault has proven himself more than capable of achieving, would turn the core business around too. If I were him I would play the long game on Hermes and wait for increased voting rights, and in the meantime deal with Carrefour. Much cheaper to pursue creeping control and much more upside.
Shareholders might find comfort that LVMH adheres to the MEDEF corporate governance code. The code sets out the requirements for independent directors that LVMH and Christian Dior would fail to meet. Nevertheless the code also states that an independent board member who does not meet the criteria can be deemed to be so if the board considers it appropriate. So we have "independent board members" like Antoine Bernheim, who was a director for over 12 years and is the architect of the holding company model. Try to find anyone else in the world who is not already on the board and is less conflicted and you would surely fail. Minorities might have hoped to have relied on an independent director to query the Cheval Blanc acquisition price. So step forward Dior "independent director" Ségolène Gallienne, daughter of Albert Frère and on the board of Cheval Blanc. Conflict of interest? Mais, non!
Nicolas Bazire, the managing director of LVMH is not just a Bilderberger, but also a partner at Gibson Dunn who count debt push down transactions for French holding companies among their specialities. There is no doubt that LVMH would rigorously defend any hint that they have acted illegally, and it is only their lack of transparency that leads one to suppose they are hiding something at the expense of both shareholders and the French state. It is simply sad, that one of the greatest French corporate success stories appears to have been built on foundations of legal loopholing. If it is not possible to make a profit in France without circumventing the spirit of the rules, then maybe companies should make a clean break and move abroad. Maybe then the French government would wake up and realise that super rich profitable companies are the biggest "contribuables" in France and should be encouraged to both set up in France and stay. If the only business model that works is to employ smart lawyers and be friends with the President who can be relied upon to turn a blind eye, then it can only damage the perception of foreign investors interested in investing in France.
(author is Tim Gittos, Director of Artannes Capital in London)
Le Club est l'espace de libre expression des abonnés de Mediapart. Ses contenus n'engagent pas la rédaction.