LVMH & Tiffany: Are Diamonds Really Forever?
Back in November 2019, Bernard Arnault – owner of luxury retail brands including Louis Vuitton, Christian Dior and Givency, and the richest man in Europe - looked to expand his luxury empire by acquiring U.S. jewellery brand Tiffany & Co. The agreed share purchase price was $135, a 37% premium at the time, creating an overall $16.2bn deal. At the time, Arnault commented that as “a globally recognised symbol of love, Tiffany will be an outstanding addition to our unique portfolio of luxury brands […] we look forward to welcoming Tiffany into the LVMH family.”
A Match made in Heaven?
Mr Arnault was attracted to Tiffany through the 7% growth in the luxury jewellery business last year, totalling $20 billion, and the growth opportunity this presented LVMH. Only 8.5% of LVMH’s revenues comes from jewellery and watches, providing Mr Arnault to expand into the growing market, and closing the gap with rival Richemont in the luxury jewellery market. Executives at LVMH also believe that supposed high barriers to entry in the luxury jewellery market will protect Tiffany from any upstarts, providing confidence about the long-term potential of the brand.
Tiffany, on the other hand, gains access to much larger marketing resources, allowing them to benefit from their industry growth. LVMH has also previously demonstrated its ability to turn around other luxury brands, like Bulgari, and planned to do the same with Tiffany by marketing the brand more to millennials.
What went Wrong?
The pandemic had other plans for Tiffany and LVMH’s happy future together. The original date for the deal to be completed by was postponed due to uncertainty imposed by the pandemic, and in a recession, the luxury good industries tend to be hit hardest. Mr Arnault has so far lost over $20bn over the pandemic, with luxury good sales estimated to decline by up to 35%. Tiffany’s sales dropped 45% in the first quarter of 2020 alone, and a further 29% in the second. As a result, the share price has also been in decline since March 2020, dropping down to $110 per share, far below the agreed $135 per share that Mr Arnault agreed to.
Over the summer, LVMH’s board of directors began to have doubts about the deal. Tiffany’s credit obligations and controversial agreement to pay its quarterly dividend of $0.58 per share, or $70 million overall, in May created further tension. Mr Arnault decided that a $135 share price was too high in the wake of the corona virus, but he was faced with a big problem: an ironclad merger agreement that can only be overturned by a court case.
A Wild Card:
On September 8th, Tiffany heard that the French government had contacted LVMH, asking them to delay the closing of the acquisition until early 2021, in order to help settle an American trade dispute. LVMH informed Tiffany it had to obey the ‘legal order’ from the government and that it could not go forward with the acquisition until after the merger agreement was due to expire. French foreign minister Jean-Yves Le Drian wrote that LVMH “should” delay the merger, a translation of “il conviendrait” which is understood to have a polite mandatory meaning. Mr Le Drian has also responded to the apparent ‘legal order’ for LVMH to not complete the merger until 2021, claiming that LVMH approached the government first, and the letter was not intended to be legally-binding.
Divorce Bells are Ringing:
The very next day, Tiffany filed a lawsuit against LVMH, claiming that they deliberately stalled the acquisition process so that the merger agreement would expire, using the pandemic as an excuse. In retaliation, LVMH has countersued, claiming that Tiffany is no longer the company that they originally agreed to buy. They have argued that Tiffany’s decision to slash capital and market investments, increase their debt, and pay cash dividends during the recession has created material adverse effect, allowing them, in their opinion, to walk away from the merger.
Mr Arnault went further than this, launching an all-out attack on Tiffany’s management, claiming that the “performance has continued to be catastrophic, and its prospects remain dismal” whilst also confirming his concern over Tiffany “distributing substantial dividends when the company was loss making.” LVMH stated that these actions highlight the “dishonesty of Tiffany in its relations with LMVH” in its September 10th statement.
LVMH also claims that Tiffany is trying to rush the merger, pointing towards greedy top executives who stand to profit from the transaction. LVMH pointed out that Tiffany’s Chief Executive would gain $44m from the deal, an amount equal to Tiffany’s losses over the first half of 2020.
An expedited trial has been scheduled for early next year. Both firms are confident in their cases, even though Delaware courts have only once allowed a buyer to walk away from an agreed-upon merger. LVMH believes that, as Tiffany failed to include a pandemic in the list of specifically mentioned risks to the merger, they have every right to walk away. Some investors, however, believe that Tiffany and LVMH will make up before the trial next January, as Tiffany’s share price remains around $116 at the moment, still above the $90 valuation that existed before Mr Arnault came along.