LVMH, the luxury conglomerate led by Bernard Arnault, is facing a crucial decision regarding the potential breakup of its diverse portfolio of businesses. As the company prepares to announce its annual earnings, investors and analysts are eagerly awaiting Arnault’s insights into the direction of high-end consumer demand.
Despite LVMH’s success, shareholders are not fully convinced of its value. The conglomerate encompasses a wide range of industries, including fashion and leather goods, watches and jewelry, cosmetics, wines and spirits, duty-free retailing, and hospitality. This diverse mix may be causing what is known as a “conglomerate discount,” where the company’s stock trades at a lower multiple compared to focused competitors. This disparity is evident when comparing LVMH’s trading multiple of around 16 times this year’s estimated earnings before interest and tax to Hermes International SCA’s trading multiple of 34 times.
While some differentiation between LVMH and Hermes is warranted due to Hermes’ unique ability to control demand for its iconic products, LVMH’s low valuation may not fully reflect the potential of its brands. For example, Louis Vuitton alone is expected to generate €12.3 billion ($13.4 billion) of operating profit this year, accounting for an impressive 51.8% of sales. By valuing Louis Vuitton and Dior at a multiple closer to that of Hermes, the two brands alone could potentially be worth as much as the entire LVMH group.
Aside from financial considerations, a breakup of LVMH could also address the succession issue that looms over the company. As Arnault approaches the age of 75, he will eventually have to decide whether to appoint one of his five children as CEO or divide the responsibilities among them. While it seems unlikely that an outsider CEO will be appointed, Arnault could potentially choose a non-family member as CEO until the next generation is ready to take over, similar to the arrangement at Prada.
However, dismantling LVMH would come with its own set of challenges. The conglomerate could be divided into several separate businesses, depending on the fate of subsidiaries like Sephora and the potential combination of retail and cosmetics businesses. Each unit having its own central functions and head office would also result in additional costs. Nevertheless, the individual businesses would still retain significant market power, surpassing their rivals.
The ultimate question is whether Arnault would be willing to break apart the empire he has spent four decades building. Recent actions, such as raising the age limit for his roles and restructuring the family’s holding company, suggest that he intends to keep it together. However, if the conglomerate discount persists and a strategic shift becomes necessary, such as a merger with Chanel or a potential acquisition by Diageo, the conversation around a breakup may become unavoidable.
Although it is unlikely that activist investors will intervene due to the company’s scale and family control, discussing the possibility of a breakup is crucial for the benefit of investors. Whether LVMH is more valuable as a united entity or as separate businesses remains to be seen, but the future of this luxury behemoth may hang in the balance.
Useful links:
1. LVMH Official Website
2. Hermes Official Website
