Has Tiffany Lost its Sparkle?
Back in November 2019, French-owned conglomerate LVMH agreed a deal to buy Tiffany, a high-end jewellery brand, for $135 a share. LVMH is the world’s largest luxury goods company established in 1987 through the merger of Louis Vuitton with Moet Hennessy.
The $16.6bn takeover originally had a deadline of August 24, with a clause allowing the possibility to extend the deadline by 3 months to November. However, in September LVMH announced that it could not complete the takeover after French government intervention.
LVMH’s legal team outlined in a letter to Tiffany that Jean-Yves Le Drian, a government official, had asked the company to delay the closing of the acquisition until January 6 to “support the steps taken vis-à-vis the American government”. The debacle has been caused by Donald Trump’s move to implement custom duties on certain French industries, including the luxury goods sector. This move was taken in retaliation to the French government adopting a digital services tax, affecting US tech giants Google, Apple, Amazon and Facebook.
When the deal was in negotiation back in 2019, LVMH offered a 37% share premium to the New York-listed share price. Since then, Tiffany’s share price has fallen to $114 a share, and analysts have predicted a 20-35% total drop in sales by the end of this year. LVMH have announced they are “very disappointed” with the first half results, which were “significantly inferior to comparable brands of the LVMH Group during this period”. This is a prime example of how many transactions agreed before the pandemic have soured, and are now overvalued, based on the complete shift in economic outlook.
What’s happening next?
Tiffany are adamant for the deal to go ahead and have filed a lawsuit against LVMH in Delaware. They have accused LVMH of using “any available means” to avoid closing the deal and dismissed the French’s governments letter as an excuse.
LVMH have since responded, filing suit against Tiffany to stop the deal going ahead. They have claimed the conditions for the acquisition were “not fulfilled” and that Tiffany has undergone a Material Adverse Effect (MAE), making the agreement no longer valid.
It is very difficult to get out of an agreed deal in the US, with courts tending to side with companies respecting the agreement. It’s looking doubtful that LVMH will be able to get out of the deal, given that coronavirus is not unique to Tiffany, and is unlikely to be deemed as a Material Adverse Effect. It’s a case that’s going to be followed closely by other companies looking for ways to exit pre pandemic deals.
In November, the deal started off as attractive to LVMH, although slightly overpriced. Large hard luxury companies are difficult to acquire, due to their scarcity. It is the least crowded category in the luxury sector, being dominated by large brands such as Rolex and Patek Philippe which are officially not for sale. It’s also a difficult market to enter due to the time needed to build up a brand image of prestige.
At first sight it seemed like a good choice. The hard luxury sector was experiencing high growth rates, there are few alternative prestigious jewellery brands and the acquisition of Tiffany would have pushed LVMH’s market share in branded jewellery to 18%, ahead of its main competitor Richemont, who own Cartier, at 14% market share.
However, the situation since November has changed significantly. The luxury goods sector has had a tough time during the pandemic. It is estimated 20-30% of industry revenues for the luxury sector are generated by customers making luxury purchases outside their home countries, with the same figure being over 50% for China. With travel bans unlikely to be lifted, the impact of reduced tourists on the European/US luxury goods market could be huge. It would lead to lower sales, growth and revenue. Furthermore, it’s not an ideal time to use cash reserves to expand, and it is clear LVMH are feeling buyers-remorse on the pricing of the deal.
If the deal does go ahead, it is likely LVMH will take an aggressive marketing approach, similar to that used for Bulgari in 2011 that saw sales double, and profit increase fivefold. Whether this acquisition is a success in the long run depends on whether LVMH can use its marketing power to reinvigorate Tiffany and improve its brand image to millennials, something Tiffany has been struggling with for years.
Images thanks to Tiffany London. Accessed 13 September 2020. https://www.the-shard.com/office-occupiers/tiffany/