Christian Dior SE: I Think LVMH Is More Attractive (OTCMKTS:CHDRF)

The Christian Dior SE Investment Thesis

Since I believe that LVMH (OTCPK:LVMHF) is one of the highest quality companies due to its strong brand portfolio, I always keep an eye on the share price. And the weak performance of the stock so far this year makes it more and more attractive. But since there is another way to invest in LVMH with Christian Dior SE (OTCPK:CHDRF) (OTCPK:CHDRY), I wanted to take a closer look to see if there is a discount, and if so, how much, and if this is a more powerful way to hold LVMH shares.

And yes, there is a discount, which is probably due to the general holding discount, but also due to the possibility of a squeeze-out. In general, however, I think it might be more attractive to hold LVMH directly.

Ownership Structure Of Christian Dior, LVMH And Financiere Agache

The ownership structure is such that the Arnault family and Financiere Agache hold the majority of the outstanding shares of Christian Dior SE. Financiere Agache is also controlled by the Arnault family, which, in addition to its stake in Christian Dior SE, is active in real estate through Transept SAS and in asset management through Aglae Management.

The main shareholders of Christian Dior SE are therefore the Arnault Family, which holds almost 98% of the shares. This shows us that the free float of Christian Dior SE is very small.

Christian Dior SE now holds 57% of the voting rights of LVMH (OTCPK:LVMUY) and 42% of the outstanding shares, while the Arnault family directly holds another 8% of the voting rights and 7% of the outstanding shares.

The idea behind investing in Christian Dior SE is to align oneself more closely with Groupe Arnault and Financiere Agache, which Arnault acquired in 1984 to launch his luxury empire.

Squeeze-Out Laws In France

In a squeeze-out, the majority shareholder can buy the minority shareholder’s shares in order to own all the shares. In return, the minority shareholders will have to be paid a fair value for the shares they hold. And if somebody owns 90% of the voting rights and the shares, that squeeze-out usually cannot be stopped. So in this case it is very important for the minority shareholders what is considered the fair value of their shares.

In 2019, when the threshold for a squeeze-out was still 95 percent, rumors began to circulate that a squeeze-out could be imminent and that Bernard Arnault could privatize Dior for nearly 2 billion euros, which would have been the price of the outstanding shares at the time.

In April 2017, Bernard Arnault made an offer to buy the shares of the minority shareholders of Christian Dior SE for €260, which at the time represented a 15% premium to the share price. And there was an option to receive Hermes (OTCPK:HESAY) shares, then held by Christian Dior SE, instead of cash. A deal that would have paid off handsomely, judging by Hermes’ performance since then. The Hermes share price was then around 440€ and is now around 1900€, after an all-time high of 2300€ in March 2024.

The big question now is what fair value means. Is the fair value the value of the LVMH shares per Christian Dior SE share, or is it a premium on that value, or is the fair value simply the value at which the Christian Dior SE shares are currently trading plus a premium?

If we look at the 2017 offer and think about what an offer would look like now, I think there would definitely be a premium, maybe 15% again, especially since Christian Dior SE shares currently have a holding discount. Therefore, the next step is to look at what the holding discount currently is and what conclusions we can draw from that.

Valuation

LVMH Shares Outstanding: 499.6m

Christian Dior SE Ownership Stake in LVMH: 42% (up from 41% at the end of 2023)

• 499.6m x 0.42 = 209.83
• Outstanding Shares Christian Dior SE: 180.4m
• 209.83 / 180.4 = 1.16x

This means that a Christian Dior SE shareholder owns 1.16x LVMH shares for each Christian Dior SE share.

• Christian Dior SE share price 09/11/2024: $646
• LVMH share price 09/11/2024: $666 x 1.16 = $772
• $772 / $646 = 1.195x.

So the shares are currently trading about 20% below where they should be based on ownership.

However, if we look at the total return over the last five years, we see that the stocks have performed very similarly, but that the LVMH stock has done better, and the difference is sometimes even bigger than the spread.

The risk I see here is this: If there is no squeeze-out, Christian Dior SE will probably underperform LVMH, and if there is a squeeze-out, the shares will have to get a premium that is large enough to make up for the lost profits. Therefore, from a risk/reward perspective, a direct investment in LVMH seems to make more sense to me.

What is interesting, however, is that Bernard Arnault has bought a lot of LVMH shares in the last few months, either through Financiere Agache or through Christian Dior SE. In my opinion, this is a sign for the fact that LVMH shares could be attractive when an insider makes so many purchases.

Conclusion

I can understand that it is attractive to be closer to the family of owners and therefore Christian Dior SE is an attractive option, but if there is no squeeze out, I think these shares will continue to underperform LVMH. Also, I have often read that dividends are an argument for Christian Dior SE, but dividends are part of the total return, and here LVMH has the edge despite the lower dividend.

And the difference is very small right now, LVMH has a dividend yield of 2.07% and Christian Dior SE 2.16%. Therefore, I do not believe that dividends make much of a difference, especially since France, unlike many countries, has a high tax rate on dividends of 30%, of which 12.8% is income tax and 17.2% is social security tax.

That is why I personally think that LVMH is more attractive than Christian Dior SE, if you believe that LVMH’s brand offering and growth opportunities are positive and that they could outperform the S&P 500 (SPY).

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.