Hermes - A Short Squeeze?

LVMH’s (EPA:MC) stake in their luxury rival Hermes (EPA:RMS)has made serious headlines. I can see why certain commentators are drawing parallels with the infamous short squeeze that followed Porsche’s aborted takeover of Volkswagen, but we need to challenge their assumptions.

The timing of LVMH’s announcement that they own 17.07% of Hermes is interesting. We have just heard US hedge fund Viking announce a formal law suit against Porsche for the VW short squeeze debacle from October 2008. Parallels have been drawn due to the sense of surprise that greeted the LVMH news since it was impossible for investors to have observed what LVMH was doing. This suited Mr Arnault but it is less conducive for your average investor trying to earn a living. The reaction from AMF (the French regulator) will tell us whether they care more about efficient markets or appeasing corporate giants.

Data Explorers estimates short selling in Hermes to be around 2.7% of all of the shares outstanding. This is 4.6% of a Reuter’s calculated free float and 5.1% of the Bloomberg version of the more liquid shares. Funds who lend own 5.4% of the total company and are lending out 31% of their shares. These are the facts such that we know them.

The field we invented to prevent another VW short squeeze – the concentration of supply (using a Herfindahl score) – is not pointing to forced recalls and therefore we are not on as alarmed as others seem to be.
The big question is whether or not anyone has lost any money as a result of the size of LVMH’s stake. Short sellers are clearly not making money now that the price is so high. But, the short interest is hardly big and is close to a three- year low. Was this because investors felt there was masses of room for Hermes to grow in today’s China fuelled scrambled for luxury? In fact, the short selling was even lower two weeks ago and some have shorted just recently thinking the price will drift back from over EUR 200. They are already right on this.

According to the FT, LVMH has been using equity swaps for some years to increase its stake. This has enabled the company to avoid disclosure. Equity swaps are pretty common these days but rarely used by corporates. Did BHP Billiton use such instruments to force Canada’s Potash Corp (POT) target into a more defensive position? No– in both the UK and the US, no company can avoid disclosure over around 5% regardless of the instruments used. LVMH has said it has no plans to takeover Hermes – so why is the company being so secretive in its acquisition of shares? It is not as dramatic as Porsche suddenly announcing a 75% stake in Volkswagen, but it is still a big stake that no one knew about.

If one looks at the “public” information about the official shareholders in Hermes you don’t learn a great deal. If Harry Potter was to float a company I doubt his shareholders would have names as far fetched as Pollux, Fleches, Falaises and Axam. These are 4 of the top 5 owners and include the French for cliffs (falaises), arrow (fleches) and a famous Greek whose father seduced his mother disguised as a Swan (Pollux)! They may be the vehicles of the company but nothing is obvious! Vanguard is the first recognizable fund manager on the register at number 10 with a mere 0.4% of Hermes as at the end of June.

This is not new news. LVMH have been slowly building up its equity swap stake in Hermes for years, such that media has reported talk that the average price per share is around EUR 80. With the European Parliament close to agreeing a deal on how to regulate alternative investment managers (AIFM), it is worth asking how long before the share disclosure rules are tightened?