Complications in the Tiffany takeover by LVMH

Last February in New York, Tiffany’s extraordinary shareholder assembly accepted the takeover of the iconic jewelry brand by the LVMH group. The deal, which was decided in less than six weeks by Bernard Arnault, would have been the biggest buyout in his history. Since then, the global pandemic, racial riots in the USA, dramatic drops in revenue in the luxury industry, as well as American tax threats on French products changed everything. LVMH announced on Wednesday 9 September it was considering postponing the Tiffany takeover and explained “that after a series of events which fragilized the acquisition of the company Tiffany & Co, the board of LVMH met to study the investment’s situation in light of recent developments”. The second argument put forward by the board, headed by Bernard Arnault, lies on the knowledge of a letter from the European Minister of foreign affairs, Jean-Yves Le Drian, who asked the LVMH group to postpone the Tiffany acquisition to a later date to January 6 2021, in reaction to USA threats on French products. Tiffany is opposed and is forcing the LVMH group to close the transaction on November 24th.

In the meantime, LVMH’s offer of 135 dollars per stock put forward last year now seems overpriced, considering the bond which, on Wednesday 9 September (by the time the article was written), was worth 111.7 dollars, dropped by 8.30 %. (It closed at 121.81 dollars on Tuesday 8 September).

What are therefore the true motivations of the LVMH group? See the price of the 14.7 billion-dollar deal from 2019 drop? Arthur Jurus, chief economist at the Landolt Bank explains: “I see three major factors that could explain the current context. First of all, LVMH’s cash was reduced to eight billion. The second factor is linked to the Euro value and since the major part of revenues is in dollars, profits would have potentially decreased by 5% simply due to exchange rates. The third factor is linked to the net debt of the group, which has increased by about two billion and which is caused by fewer sales and profit. The net effect is therefore very unfavorable. We can assume that these three factors are worth much more than the 14.7 billion-dollar original deal.”

Regarding the intent to buy Tiffany and whether this is still on the table, it is hard to consider another group financially capable of acquiring it. Arthur Jurus confirms: “LVMH is probably one of the rare European luxury groups capable of proceeding with these types of acquisitions in Europe. The evolution of profit is decreasing, yet less than in other competing groups. Furthermore, performances of share capitalization are still evolving.” Looking at investors’ opinions, they are rather positive on the LVMH share. If this acquisition were to damage it, this would transpire on the share’s quotation.

For a few months, mergers and acquisitions have accelerated and should hit the luxury industry as well. For the time being, suppliers experiencing difficulty are the first concerned. In fact, Chanel has strengthened its leather supply chain by acquiring an Italian tannery, Conceria Gaiera Giovanni, last April. Arthur Jurus adds: “The data isn’t the same according to sectors. If you look at risk premiums of mergers and acquisitions in the tech sector, they increased. This means big groups have cash, buy and are ready to pay more than they would have six months ago. Covid has not generated sizeable impact that could push these groups to negotiate cheaper acquisitions. However, in other sectors, such as financial services or energy, some groups takeover others at cheaper prices. In the luxury sector, with the data we have, i.e. the acquisitions, it’s still too soon to say. It is therefore possible that the LVMH group will try to pay a cheaper risk premium than pre-Covid".

Tiffany’s actions against LVMH will be complicated to say the least. As will political pressure. This deal will certainly leave a mark in history over the next few weeks.