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M&A Deals

Upheaval over ‘a deal made in heaven’

In November 2019, LVMH (owned by Bernard Arnault) agreed to purchase the iconic U.S. jewellery brand Tiffany, a deal that seemed a match made in heaven. However, then the coronavirus pandemic hit, stalling the purchase of luxury goods, and massively affecting Tiffany. LVMH was led to feel uncertain about the deal they had entered into and the resulting tensions have broken out into a legal spat between the two luxury retail firms.

LVMH 

Founded: 1987

Sector: Consumer cyclical – luxury goods

CEO: Mr. Bernard Arnault

Share price (correct on 14/9/2020): €420.25

Market cap: €203.64bn

Tiffany & Co.

Founded: 1837

Sector: Consumer cyclical – luxury goods

CEO: Mr. Alessandro Bogliolo

Share price (correct on 14/9/2020): $113.47

Market cap: $13.88bn

Deal overview

The originally agreed deal, back in November 2019, was for LVMH to purchase Tiffany at $135-a-share, leading to a $16.2bn takeover ($16.6bn including net debt). Therefore, the deal was to be the largest ever takeover in the luxury retail sector. This price per share was a 37% premium on the share price at the time to persuade investors to get on board, after initially offerring $120-a-share. The deal was originally scheduled to be completed by now but was pushed back due to the pandemic. 

Deal rationale

Last year, Mr. Arnault hailed Tiffany as an “American icon” that he thought would fit perfectly into the LVMH portfolio “to thrive for centuries to come”. This move made sense strategically as LVMH was lacking a presence in watches and luxury jewellery – such “hard luxury” goods accounted for only 8% of LVMH’s sales and 6.5% of operating profits last year, with most of their profits coming from “soft luxury” goods such as Louis Vuitton handbags and apparel.  Before COVID-19 came around, “hard luxury” had been expanding faster than “soft”, growing at a compound annual rate of 6% from 2010 to 2019, according to Bain. Acquiring Tiffany is emblematic of Arnault’s mercurial management style, honed over decades of assembling his luxury conglomerate: from Champagne to Dior haute couture to sturdy Rimowa suitcases and luxury hotels. 

Tiffany’s share price. Image from the Financial Times

For Tiffany, joining the Arnault family will bring promised access to a powerful branding machine. In the past, this has helped elevate smaller or family businesses such as Bulgari or Loro Piana. This, combined with the premium being paid, means the deal makes a lot of sense for Tiffany. Therefore, both parties should be walking away happy. 

What went wrong?

A little thing called COVID

It would be hard for anyone to have overlooked the massive impact the pandemic has had on retail and luxury retail in particular. Arnault himself saw his personal fortune shrink by $20bn throughout the pandemic. This year, sales of luxury goods are set to contract by up to 35% and fine jewellery sales are expected tol fall by 7%; recovery is not expected before 2023. Tiffany shares have also been on the decline since the start of the coronavirus crisis, meaning the large premium LVMH were willing to pay is now starting to look rather expensive and overvalued. It no longer looks like a good time to be offering up $16.6bn for a luxury retail brand.

Tensions began to rise

From being known as the “wolf in cashmere” due to his hardball deal-making tactics, it is no surprise Arnault began manoeuvring over the summer to find ways to renegotiate. Tensions were thrust into the open eye in June when a story in fashion trade publication WWD reported strong concerns among LVMH’s board of directors about the deal. At the same time, the jeweller was being granted more leeway by lenders to meet credit obligations — not a great sign for LVMH. But, if Tiffany missed a debt payment, it would potentially open up the merger contract to renegotiation, which would work in LVMH’s favour. But it is thought such a scenario is unlikely given Tiffany announced on May 20th  that it would pay its quarterly dividend of $0.58 per share as planned. 

LVMH released a statement, following the board of directors’ concerns, promising not to buy shares in Tiffany on the open market to push down the price. However, they pointedly omitted any commitment to the takeover — a move designed to spook Tiffany and its investors in the hope of a price renegotiation. The moves were little more than a bluff, since it was unlikely LVMH could back out of the deal as there is an iron-clad merger contract that they can only get out of through a court case. 

French-US tensions

On September 8th, Tiffany received news of a letter written to LVMH from the French foreign minister asking the Paris-based retailer to delay the closing of the acquisition until January 6th to “support the steps taken vis-à-vis the American government”. This was in reference to Trump’s move to implement customs duties by that date on certain French industries, including luxury goods. LVMH then informed Tiffany it had to obey what it believed was a legal order from the government and therefore could not complete the acquisition before the merger agreement expired on November 24th 2020. However, French officials have since denied that the letter was a binding request.

The following day, Tiffany filed a lawsuit against LVMH, accusing the French group of stalling the antitrust process to run out the clock on the merger agreement and alleged it had come up with ways to use the pandemic and social justice protests in the US to renegotiate the deal. In retaliation, LVMH has planned a countersuit, using the argument the pandemic has been a “material adverse change”, which they then believe Tiffany mismanaged — berating the jeweller’s decision to pay dividends in a time of crisis. Both sides are confident in their case and believe they will win, which may lead to a lengthy and expensive legal battle in a time when the luxury sector needs to focus on its recovery. If LVMH were to win the court battle this would set a strong precedent for any other similar situations; with the massive reach of COVID-19, in many different sectors, this would have a huge impact . It may encourage other companies, who are no longer happy paying a price they agreed before the pandemic, to try and back out of or renegotiate deals. 

A diamond deal in the rough  

It seems that the LVMH takeover of Tiffany being scrapped would lead to a good deal being missed out on. But, it looks like there is still cause for optimism, with investors keeping the share price of Tiffany higher than it was a year ago, before the deal was announced. Flavio Cereda, an analyst at Jeffries, said “the share price is telling you that the market does not think the deal is dead.” Not many seem to think this is the end for LVMH and Tiffany, with suggestions Tiffany is an asset Mr. Arnault does desire, he just does not want to pay this price during the current market environment. If a renegotiation can happen, both parties may leave significantly happier than if the deal is to be called off completely or having fought a lengthy legal battle, and the deal still going ahead.

Sources:

https://finance.yahoo.com/quote/MC.PA?p=MC.PA

https://finance.yahoo.com/quote/TIF/key-statistics?p=TIF

https://www.ft.com/content/2164c15d-b821-4cd7-98a8-269561c0ade2

https://www.ft.com/content/72af09b4-12a4-45ad-86ca-919d38e279e8

https://www.ft.com/content/df9f9bf5-daf5-40e5-9c53-ea3f3ba41f61

https://www.bloomberg.com/news/articles/2020-09-12/the-french-wolf-in-cashmere-tears-into-tiffany-after-deal-sours

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