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With America in Chaos, Will LVMH’s Tiffany Acquisition Go Ahead as Planned?

Analysts and media speculated last week that the conglomerate has cold feet about buying an American company in the middle of the crisis. In the end, the partnership still makes sense.
Tiffany & Co.和Louis Vuitton线下店铺 | 图片来源:Shutterstock
By
  • Lauren Sherman
BoF PROFESSIONAL

NEW YORK, United States — When LVMH announced in November that it was buying American jeweller Tiffany & Co. for $16.2 billion, the deal was positioned in the press as a major win for the world's largest luxury group, allowing it to gain an even stronger foothold in the fine jewellery market, an area of the business once dominated by its rival, Richemont.

It was also decades in the making. LVMH Chairman and Chief Executive Bernard Arnault has been eying Tiffany for years, and came close to purchasing it in 2011, but instead opted for the Italian jeweller Bulgari, which fared better during the 2008 economic downturn. This time, Tiffany's high price — $135 per share — seemed worth it, even as its prospects dwindle in the US, where it relies heavily on falling tourism dollars to fuel its sales. Especially given the brand's global recognition and growing presence in China, the control centre of growth in the sales of personal luxury goods.

But, as the coronavirus pandemic took hold globally, with lockdowns halting commerce in several regions, the industry began to whisper. What would happen to the LVMH-Tiffany partnership, which was set to be formalised by the middle of 2020? In April, Australian financial regulators said they needed more time to review the deal, which had been approved in the US and Europe. Then, in early June, just as the extent of the pandemic's damage to the US economy began to crystalise, civil rights protests swept the US, underscoring that the region's challenges reach far beyond those brought on by the coronavirus.

Along the same timeline, an “an astutely orchestrated ploy” by LVMH to pay less for what it has promised Tiffany has unfolded, illustrating Arnault’s masterful negotiation skills — but hardly dissolving what is still likely to be one of the biggest deals in the history of the luxury market.

Does he want a better price? Yes. Does he want to lose it? I don't think so."

“Does he want a better price? Yes,” said Elsa Berry, managing director and founder of Vendôme Global Partners. “Does he want to lose it? I don’t think so.”

It all started with a short, detail-scant item in industry trade Women's Wear Daily, which said that at an LVMH board meeting on June 2, members reportedly discussed uncertainty concerning the deal in the context of the global pandemic and particular circumstances in the US. It also raised the question of whether Tiffany would be able to honour its debt covenants, given the significant reduction in cash flow due to pandemic-related store closures.

Tiffany's stock fell 9 percent immediately following the news. Then, on June 4, LVMH released a short statement, declaring that it had no intentions of buying Tiffany shares on the open market, which would allow it to take over the company at a cheaper price than the $135 per share it agreed to in November. (In late March 2020, it released a similar statement, emphasising that the agreement between the two companies prohibited such action.)

In the middle of all of this, Tiffany, which also hosted a board meeting last week, said it would push back its first-quarter earnings report from June 5 to June 9. Sources told Reuters that the company believed its deal with LVMH was "ironclad," and that the American firm would be willing to go to court before walking away.

By the end of the week, Reuters said LVMH was backing off and would not fight the original deal. Yet, over the weekend there was more speculation among current and former employees of both companies that LVMH is indeed looking for a way out, as Tiffany does everything it can to ensure it is not in breach of contract.

Tiffany's Tuesday earnings report, which covers the three months ending May 31, may bring further clarity: sales are down significantly, and the company has not adjusted its product offering in any way to reflect the current state of the world. But unlike disgraced lingerie brand Victoria's Secret, whose deal with private equity firm Sycamore Partners dissolved amid the pandemic, Tiffany is not a business in panic mode, and it should be able to pay its bills. At the end of 2019, Tiffany had $897 million in cash and cash equivalents, and announced in May it would pay a quarterly dividend to shareholders.

The fact remains that there are still many reasons for LVMH to acquire Tiffany, especially if the price can be renegotiated. The deal is mutually beneficial.

For LVMH, Tiffany would help further establish the group’s standing in hard luxury, where it has had success with Bulgari, which it acquired for $5.2 billion in 2011. “LVMH does indeed have strategic reasons to take Tiffany over,” said Bernstein analyst Luca Solca.

While hard luxury has been hit during the lockdowns as a high percentage of sales are still made in physical retail compared to other categories, it's viewed as a long-term investment by consumers. (It's also good for short-term portfolio balancing. In recent years, LVMH has made big investments in hospitality, a category on hold for the near to mid-term future as recreational travel remains taboo.)

“Jewellery is likely to be preferred by consumers concerned by the recession, as it is perceived to be more valuable and longer lasting,” Solca added. “It is also bought by older consumers, who should in theory suffer less of a blow by the economic dislocation.”

Plus, Tiffany is a global name in the highly fragmented, mostly unbranded fine jewellery market. And its business in China, now the centre of luxury consumption, grew by double digits in 2019.

Owning Tiffany would also significantly broaden LVMH's operations in the US. None of its US-based fashion investments — including Donna Karan International and Marc Jacobs — have amounted to great long-term financial success. (Michael Kors, of which it used to own a 33 percent minority stake, became a billion-dollar brand after it left the LVMH fold.) In beauty, it has Sephora's US operations and brand incubator Kendo. But owning an American heritage brand would be different.

"The US is still the US — it’s not disappearing as an important luxury market," Berry said. "People are thinking more local now, and you’ve got to be close to your customers."

LVMH will also be able to make Tiffany much bigger, using its marketing and branding expertise, as well as its extensive real estate network, to refresh the brand’s image. (For instance, Tiffany's store positioning off the Place Vendôme, the centre of jewellery shopping in Paris, is not ideal. LVMH could change that.) Even at the high price of $16.2 billion, this was true.

It's also unlikely that LVMH would go to court unless it was to save the deal, not dissolve it. "In the past, LVMH was not shy going to court, but it was to take companies over – Hermès is a case in point, and before that, Gucci," Solca said. "It would be a first that LVMH goes to court not to take a company over – I would consider this scenario unlikely."

For Tiffany, there’s never been a more advantageous time to join LVMH. As the industry continues to consolidate, the costs associated with maintaining an independent operation becomes more difficult to justify. Recovery, especially in the US, will not be instant, and it’s likely that any sort of deal — even a renegotiated one — will be in the best interest of shareholders.

Short-term, it’s easy to understand why LVMH could be wavering. But Arnault doesn’t play a short-term game. “He’s wanted this brand forever, and he doesn’t like to lose,” Berry said. “He’s extremely smart, he’s rational and this means a lot to him.”

This isn’t over. But the outcome — whether it’s in 10 days, or in a few months — is near-guaranteed to be that Tiffany, a 183-year-old brand, will be a part of LVMH by the end of the year.

Disclosure: LVMH is part of a group of investors who, together, hold a minority interest in The Business of Fashion. All investors have signed shareholders’ documentation guaranteeing BoF’s complete editorial independence.

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