On November 24th, 2019, Tiffany got ‘’engaged’’ with the French giant of luxury goods LVMH when the two parties signed a $ 16.2 bn Merger Agreement for the acquisition of Tiffany. According to the Agreement, LVMH had nine months to obtain approval from the European Antitrust Commission before launching its Public Takeover Bid, latest on August 24th. However, in early August, Tiffany’s Board had asked to postpone the expiry date of the Merger Agreement as it became aware that LVMH had delayed the notification to the Antitrust Commission. And finally, in September, Tiffany decided to take the case to court and legally oblige LVMH to execute the Merger Agreement. The day before, Tiffany had been informed by the LVMH’s Finance Director that the French Foreign Ministry had formally warned LVMH not to conclude the transaction before January 6th, 2021, the date on which the United States would have decided on a taxation on luxury goods. So how has such a promising deal finally languished... ?
The story of two luxury giants…
Over the last thirty years, LVMH hasn’t stopped growing to become the worldwide leading luxury company. Everything started in 1987 when the leather goods producer, Louis Vuitton, merged with the champagne and cognac manufacturer Moet and Hennessy that gave birth to the well-known LVMH group. Two years later, Bernard Arnault became its majority shareholder. Since then, he has engaged in a frenetic strategy of external growth by acquiring over seventy worldwide leading luxury companies among which such famous fashion and jewelry brands as Dior, Givenchy, Céline, Kenzo, Fendi, Marc Jacobs, Guerlain, Chaumet and Bulgari as well as important media groups with Les Échos and Radio Classique and retail outlets with Sephora and Le Bon Marché. As of today, the French luxury giant has a market capitalization of around $ 234 bn (€ 200 bn), higher than Kering $ 86 bn (€ 73 bn €) or Richemont $ 37 bn (€ 32 bn). As an indication, over the last thirty years, Arnault has multiplied the company value by a factor of 57.
Figure 1: Timeline of LVMH acquisitions
Founded in 1837 by the New York jeweler Charles Lewis Tiffany, the Tiffany Brand is well known for its unique heritage which allies tradition and innovation. For nearly 200 years, Tiffany has been an icon of American luxury and one of the top jewelry brands in the world, famous for its magnificent diamond engagement rings. Tiffany’s worldwide renowned “blue-box”, trademarked since 1998, has become a symbol of ultimate luxury. Truman Capote’s bestselling novel « Breakfast at Tiffany’s », which soon became a movie classic, illustrates the strong association of the Tiffany brand with love, engagement, and marriage.
Since the very beginning, Tiffany’s main product line has been engagement jewelry, especially diamonds, with 25% of total group sales. Tiffany being positioned on the jewelry market, one of the fastest growing segments of the luxury market, and having a net profit of 12%, LVMH could justify paying a P/E ratio of 30, well above the average P/E ratio of the New York Stock Exchange of 13 – 15%.
Figure 2: Size of the global luxury market (billion euro) and YOY growth rate (%)
As of today, Tiffany has more than 300 stores and 14000 employees around the world. About 40 percent of the group’s sales are generated in the Americas, namely in the United States, a market which is expected to grow by nearly 7% over the next three years. Asia represents a third of Tiffany’s total turnover with China making up for 60% of Asian sales and Japan for 15%.
What could the mariage bring to both LVMH and Tiffany?
Being the only publicly held high end jewelry company with highly attractive collections, Tiffany was a perfect target for LVMH’s desire to further strengthen its jewelry segment. Indeed, Tiffany would balance LVMH’s portfolio, both in terms of products and regions. Tiffany's products fit ideally with LVMH’s strategy of bringing together tradition and modernity.
Its large product range from easily accessible silver jewelry to diamond rings positioned in the very high end of the luxury jewelry market would help LVMH to better penetrate the oriental jewelry market. Moreover, Tiffany’s geographical footprint is complementary to the French LVMH group which is particularly strong in Europe with nearly 1200 outlets and in Asia with nearly 2000 retail stores.
Besides, LVMH considers Tiffany a little exploited brand with high growth potential. LVMH, being known for managing its brands in a highly profitable way, had shown its ability of integrating and turning around a high end jewelry company with its acquisition of Bulgari in 2011. Bernard Arnault was convinced of LVMH’s capacity for increasing Tiffany’s worldwide market penetration through its international retail distribution network and for further boosting Tiffany’s profitability.
Moreover, Tiffany is an attractive investment for LVMH thanks to its deep-rooted experience with sustainability which has become an important cultural value for the company. For over thirty years, Tiffany has been strongly engaged in protecting the environment and in respecting human rights. Tiffany’s long-standing vertical integration gives it complete control over its supply chain. This in-depth experience might contribute to further improve LVMH’s image on this fundamental aspect.
As in every acquisition deal, LVMH relies on synergies at group level. LVMH could provide Tiffany with a more stable management which had changed several times over the last years.
The Impact of an unexpected crisis...
The Covid crisis highly impacted the LVMH group. On June 30th, 2020 sales had fallen by 28% compared to a year earlier. Arnault and four Directors had manifested their personal contribution to cost reduction by renouncing to two months of salary. Moreover, LVMH has actively participated in the fight against the pandemic by adapting a product line to mask production and to the production of hydraulic gel.
A divorce before a marriage...
In response to the GAFA tax imposed by the French government in July 2019, the U.S. hastened to firmly respond by threatening to introduce a 25% customs tax on French cosmetics and handbags from January 6th 2021 onward. In the meantime, negotiations within the OECD are still ongoing to find a bilateral agreement. However, against all expectations, Jean-Yves Le Drian, the minister for Foreign Affairs sent a letter to Bernard Arnault to urge LVMH to postpone once again what would have been the marriage of the century in the luxury sector. This decision has been taken not only in order to have a lever in negotiations in the trade war with the US but also to avoid LVMH falling victim to the American-European battle. In fine, following this further postponement, LVMH has announced to call off the acquisition in that it would have entailed a new source of uncertainty among the group's shareholders.
Besides, Jean-Jacques Guiony, the LVMH Chief Financial Officer, stated he was not satisfied with the way the jeweller managed the crisis. In addition to the poor results mentioned above, Tiffany would have kept paying out the quarterly dividends to its shareholders, namely a total of $140mn distributed once in May and once in August while being in a pure loss situation. Moreover, it is relevant to note that even before the crisis, Tiffany was already struggling to keep its revenue away from declining due to a decreasing tourist purchase power as well as a strong dollar. We could also wonder whether rumors claiming that the French group would have tried to renegotiate the price down are true or not. Although it has been asserted to be pure hearsay, it is likely that Tiffany's poor results have altered LVMH’s willingness to keep the $16.2bn price this high. Indeed, while the initial offer was fixed at $135 per share, leading the company’s value to 17 times its pre-crisis EBITDA, the stock has been moving away from that level ever since and was finally trading at $120 at the end of August, suggesting that the French conglomerate would indeed see the offer far too overvalued. At least in the current state of affairs.
On the day LVMH announced its withdrawal from the takeover bid, Tiffany's share price plummeted by more than 7% to $113 whereas LVMH’s remained steady and even rose by more than 5% in the following days. These respective moves on the markets suggest that adding this 76th brand to LVMH’s existing portfolio wasn’t as crucial for LVMH as for the American jeweller, explaining, among others, Tiffany’s subsequent reaction. Indeed, after the break-up, a dispute and legal battle has begun between the two groups. To protect its business and its shareholders, Tiffany first responded to LVMH's decision by taking it to court for failing to honour the proposed acquisition and for not having acted diligently to obtain the administrative authorisations relating to anti-trust regulations. According to Roger Farah, Tiffany's chairman of the board, the luxury group would also have taken several actions to revise the initially agreed bid downwards. LVMH expressed its astonishment at Tiffany's action, which he said was unfounded, and rushed in turn to take the jeweller to the Delaware civil court for defamation, bad faith but above all for its very bad results. As a matter of fact, the French group invokes a case of force majeure linked to the COVID-19 crisis to justify its withdrawal from the project. However, Tiffany defends itself by claiming that it will undoubtedly return to pre-crisis profitability in the fourth quarter with an even higher level than the same period in 2019.
Figure 3: Tiffany's stock
Figure 4: LVMH's stock
What about now? Is the marriage irrevocably over? The trial will take place on January 5th in the Delaware court, and LVMH is genuinely confident that it will be able to dismiss Tiffany's charges and prove that the conditions for the marriage are no longer met. However, there may well be a well-thought-out strategy on Tiffany's part to push LVMH to return to the negotiating table. Indeed, if the lawsuit continues, it will not only be a waste of time and money for both parties, but it could also damage their image as well as their shareholders’ confidence. Eventually, some analysts believe that the intended withdrawal was the only way for LVMH to get Tiffany back into negotiations to readjust the price to a level in line with the post-crisis situation. It now remains to be seen whether, in the meantime, this legal battle will lead to a definitive separation or to a resumption of negotiations that could meet both groups’ wishes. Story to follow...
Edouard Wauquier - Head of Corporate Finance
Bianca Burrus - Paris II Panthéon Assas