LVMH vs Tiffany: Deal or No Deal?
The largest acquisition in the history of the luxury goods sector is collapsing, setting up what could be the biggest luxury M&A battle of all time. BoF lays out five possible outcomes.
NEW YORK and PARIS — On Monday, September 21, a Delaware court will hear Tiffany & Co.'s case to force French luxury group LVMH and its Chairman and Chief Executive, Bernard Arnault, to move ahead with its $16.2 billion acquisition of the historic American jeweller, agreed upon in November 2019, just months before Covid-19 shuttered stores and pushed the profitability of luxury and fashion companies off a cliff.
After months of insisting it would honour the deal, LVMH has walked away — with both parties lashing out publicly against each other, throwing accusations of pandemic-era mismanagement left and right — and finds itself in a face-off against Tiffany in court. The French group claims it can't pursue the deal due to a French government request amid trade turmoil with the United States, while Tiffany claims the attempt to back out of the agreement is a means to negotiate a lower price.
Last-hour renegotiations in mergers and acquisitions often happen when the buyer sees an opportunity to strike a better deal. “This isn’t an isolated manoeuvre,” said Kathryn Rudie Harrigan, a professor at Columbia Business School. But the high price LVMH agreed to pay for Tiffany — and Arnault’s history of landing in court to get exactly what he wants — means that this match made in high-end heaven is far from guaranteed.
In court, Tiffany will argue, according to a suit filed last week, that LVMH has intentionally dragged out regulatory approvals and fished for evidence of mismanagement that could invalidate the deal. (Since Tiffany filed its suit, LVMH has filed for regulatory approval in the European Union and had anti-trust clearances expedited in Taiwan. The deal was also approved in Mexico and Japan during this time period.)
While Tiffany wants to expedite the case, LVMH is asking for a six-month delay.
For LVMH, the strategic rationale for closing the deal remains sound. After long dominating the market for "soft" luxuries including leather handbags and shoes, the acquisition of Tiffany would change the game for the French group by more than doubling its share in so-called “hard" luxuries, which include fine jewellery and watches. LVMH has long trailed Cartier- and Van Cleef & Arpels-owner Richemont in this space, though it gained ground with its 2011 acquisition of Italian jeweller Bulgari.
For Tiffany, too, which has lagged in modernising its retail stores and marketing campaigns, being acquired by LVMH would bring welcome expertise in branding and customer experience in order to combat a tough North American market and accelerate progress in China.
But with 2020 came the coronavirus, which forced store closures and crushed consumer demand, shrinking sales and margins for both firms. With luxury sales down an average of 41 percent in the second quarter of the year, according to UBS, it’s no surprise that LVMH no longer wants to close at the original price.
While Tiffany's position is clear — the jeweller is pressing for the deal to go ahead at full price — LVMH’s objective isn't as easy to divine. Arnault has been interested in Tiffany for decades, and he doggedly and aggressively pursued this purchase at the height of the market. (In the suit, Tiffany said that LVMH increased its bid five times, including three times in one day before an agreement.)
Whether Arnault still thinks LVMH can afford to pay for and integrate an acquisition of this size is cloudier. Either way, he is unlikely to want to pay full price if he believes he can do better.
"The deal still makes sense strategically, but for Mr. Arnault, it's also important to act and be seen as a smart buyer," said Mario Ortelli, a luxury consultant. “When you play hardball, as Arnault has shown in the past he’s willing to do, sometimes you have to make believe you’re really walking away."
Whether the deal is consummated at the original price, renegotiated or falls apart definitively will depend on several factors. What's the standard for managing a company "according to the ordinary course" during an unprecedented pandemic? Is Tiffany ready to go up against LVMH in litigation? And most importantly, how badly does Arnault want the asset?
BoF lays out five possible outcomes.
Scenario 1: Tiffany gets LVMH to close the deal at the original price.
Tiffany's case against LVMH is set to be tried in Delaware, a state which, as the legal base for many multinational companies, prizes its expertise and efficiency in litigating financial disputes. Multi-billion dollar merger contracts are familiar to judges there, who could review the case quickly and demand that LVMH move forward.
Tiffany's stock is still trading as high as $116 per share, while analysts estimate it would be worth as little as $75 if the deal collapsed, implying many investors are still banking on a deal at or close to Arnault's original price of $135 per share.
At present, LVMH's principal argument for voiding the merger contract has been that it can't close the deal due to a request for delay from the French government. LVMH said that, in a letter, the foreign minister asked to hold off on closing the deal while a trade agreement is negotiated with the US. (The US is threatening to raise tariffs on French goods in response to an effort to tax American internet companies.) However, LVMH has yet to release the original letter, only an English translation.
If the court decides not to consider that request as legally binding, LVMH will have to find another way out of the contract or pay up. French officials are already saying that the request was merely "advice" to the company and not an order, Reuters reported.
“This situation shows the high level of proximity between the French establishment and the government,” said Sophie Vermeille, a French corporate law specialist. But Vermeille doesn’t expect the administration to back up LVMH’s assertion that the letter should be seen as binding. “The French administration would not take a route that would be broadly criticised, or could even be illegal, to preserve the interests of a private party, even one as important as LVMH.”
LVMH could fight an unfavourable ruling and further tie up the deal in courts. But other factors could encourage the company to get the deal back on track. Luxury sales or the economy as a whole could rebound more quickly than expected from the Covid-19 crisis, making the original price appear palatable again. A coronavirus vaccine, a trade agreement with the US, economic stimulus packages or the threat of a competing buyer for Tiffany are all wild cards that could support this outcome.
If Tiffany has its way, it will emerge with a full-price deal and could even seek damages for delays in closing, a person familiar with the board's thinking said.
Scenario 2: The deal is done, but at a lower price than previously agreed.
It's hard to imagine that Arnault, who was ready to pay $16 billion for Tiffany, has truly lost his appetite for acquiring the company.
Tiffany's suit claims that before calling off the deal, LVMH had already deployed numerous tactics aimed at securing a lower price—which the jeweller currently has no intention of accepting, a person familiar with the board’s thinking said.
But LVMH has so far revealed few details of its case for voiding the merger, and the strength of its arguments will be a key variable.
“Throughout this litigation, the board of Tiffany will be constantly engaging in an internal calculation of whether or not they’re going to win,” said Brian Quinn, a law professor at Boston College.
Whether Tiffany would eventually settle for less money could depend on how certain the brand's managers are to win their case, as well as how confident they are that the deal could be enforced promptly (or if litigation will drag on). They'll also be factoring in the chance that they could walk away with nothing.
Analysts at investment banking firm Cowen & Co. estimate that Tiffany shares could plunge to $75 should a deal fail to materialise — a bit more than half the price Arnault agreed. If Arnault renegotiated the deal as high as $120 per share, that would still save him around $2 billion.
LVMH could try to prove that a "Material Adverse Effect" (or "act of God") clause has been triggered since the pandemic. They could also argue that Tiffany's executives failed to manage the brand according to the "ordinary course of business" since the deal was struck. On a call with reporters in early September, LMVH Chief Financial Officer Jean-Jacques Guiony railed at Tiffany for paying a cash dividend to shareholders even after the company became loss-making during the lockdowns.
Tiffany, which has since returned to profitability, will argue it had the right to pay dividends during the merger period. (The original agreement indicated that Tiffany should pay dividends after signing and before closing.) Ultimately, an argument criticising management's choices is likely to be an uphill climb.
"LVMH can argue that Tiffany breached its covenant by not operating in the ordinary course,” Quinn said. “But how do you say what is the ordinary course in a global pandemic?"
For Tiffany, the question will be: what is better for shareholders? To cash-out at a lower price, or remain independent? This calculation depends on Tiffany’s long-term prospects.
“You have to be realistic,” said Columbia’s Harrigan. “If this is as high an offer as they’ve ever gotten and ever likely to get… the world is changing.”
Scenario 3: Arnault goes hostile, tries to buy Tiffany on the public market.
LVMH denied reports earlier this summer that it would buy Tiffany shares on the open market, taking advantage of the fact that the jeweller’s market capitalisation is lower than the price enshrined in the deal. Even so, the market reports called attention to the fact that Tiffany's shareholding is fragmented, with many small stakes and shares traded openly on the market, making it a potentially viable target for a hostile takeover.
If LVMH wriggles out of its current merger contract, could it really take control of Tiffany’s shares simply by buying them on the open market, rather than negotiating a new deal? Bernard Arnault once bought as much as 23 percent of Hermès, secretly building up shares through various investment vehicles before he was found out (and ordered to sell). But such a move is unlikely in the US, where corporations can defend themselves from hostile takeovers by adopting "poison pill" clauses that dilute the stakes of unwanted investors.
"A hostile takeover quickly becomes a Sisyphean task," Boston College's Quinn said, referring to the figure of Greek mythology condemned for eternity to push a boulder up a hill.
In the case of Tiffany, the board would remind shareholders that Arnault and LVMH had been willing to pay a hefty buyer's premium previously and take steps to prevent him from circumventing their approval in the future.
Scenario 4: The deal dissolves, but someone else swoops in.
If the relationship between LVMH and Tiffany further disintegrates, another party could swoop in and make a competing offer.
The two most obvious bidders would be hard-luxury leader Richemont and Kering, LVMH’s greatest competitor in fashion and accessories. For Richemont, winning Tiffany would be a defence against LVMH’s growing power in the watches and jewellery space. But in the past few years, Richemont has lost hundreds of millions of dollars running Yoox Net-a-Porter Group, and also had difficulty in the watch market, which took a hit as Chinese government gifting policies changed. The watch market has also been affected by the rise of the Apple Watch and the shifting priorities of young luxury consumers across the globe.
For Kering, buying Tiffany would give it much stronger footing in the hard luxury space. Earlier this month, the group's watch brands said they'd lay off 25 percent of employees due to declining sales. And while French jeweller Boucheron has raised its profile under Kering’s umbrella, it’s still small compared to market leaders. Buying Tiffany would market Pinault’s second major acquisition since taking over the company in 2006 — the first was his troubled purchase of Puma, which the group spun off in 2018 — and mirror his father’s white-night acquisition of the Gucci Group out from the clutch of Arnault in 2001.
But whether either Richemont or Kering is hungry for such a deal remains unclear.
Richemont, a cash-rich company, is warning it needs to “err on the side of caution” because of how much it has lost in the pandemic. Also, Richemont, while an expert in hard luxury, lags competitors in marketing, branding and store experience, areas where Tiffany needs support.
For Kering, which has the least expertise in hard luxury of the “big three” major groups, taking on such a large acquisition may be riskier than for its two rivals. Most importantly, neither of these companies would likely do an all-cash deal. Instead, it would be a mix of stock and cash, not as good for Tiffany shareholders. Tiffany executives insist that the company was not seeking a buyer before LVMH showed interest, which means it would take a lot to convince the board that another deal was worth pursuing.
“It comes down to shareholder approval at a certain price,” said Chen, the Cowen analyst. “What is someone willing to pay, and what are shareholders willing to accept?”
Scenario 5: Tiffany remains independent.
In a Delaware court, LVMH will struggle to prove that the pandemic and socioeconomic outlook degraded Tiffany enough that the deal should not be honoured. Material adverse claims are difficult to prove in court, especially when both companies have healthy balance sheets. At the end of the second quarter of 2020, Tiffany had more than $1 billion in cash and cash equivalents available. LVMH, while struck hard by the lockdowns, had already raised more than $10 billion in cash to fund the deal — much of it at negative interest rates — in a record-breaking bond sale in February.
“The clauses’ vagueness means that they are hard to prove and therefore expensive to litigate, so parties often don’t want to spend the money to litigate them,” said Cathy Hwang, a professor of law specialising in mergers and acquisitions at the University of Virginia. “The other thing is that Delaware has just always found that there’s a high bar to establishing a material adverse change or event.” The first-ever Delaware ruling in favour of a party citing the material adverse claim was only in 2018.
Of course, Arnault is not just any adversary, and the dissolution of private equity firm Sycamore’s deal to buy Victoria’s Secret early in the pandemic could spur a new way of thinking, even if that particular case was settled out of court.
If the court in Delaware rules in favour of LVMH, Tiffany could very well go it alone and still appease shareholders, who have received dividends for 131 consecutive quarters.
“The things that LVMH has liked about this business haven’t really changed,” said Cowen analyst Oliver Chen, citing the company’s strength in bridal, the success of its modern fashion collections — the Tiffany “T” line, first introduced just a few years ago, generates around $1 billion in annual sales — as well as its China growth, where sales spiked 90 percent following the lifting of lockdown restrictions. “What’s happening right now in terms with mergers, agreements, lawsuits — they don't necessarily impact five years from now. LVMH typically owns brands with long-term histories.”
“If they’re a good board, [Tiffany] will tell Arnault to go take a walk and look at his numbers again,” added Columbia’s Harrigan.
Then again, Tiffany’s troubles in North America precede the pandemic. As social mores shift, with people marrying later and the traditional princess-bride wedding waning in popularity, the company needs to modernise its image — and fast. It has begun that process with the renovation of its Fifth Avenue flagship and release of new product lines, but there is more work to do on retail, marketing and design, all areas of strength at LVMH.
In an increasingly consolidated industry, being a part of a larger group would no doubt be beneficial. While other potential acquisition targets might be more wary of LVMH than they would have been prior to the events of the last few months, big groups like Arnault's — which have suffered during the pandemic but not as much as most — remain one of the only viable strategic options. Moving forward, it's only getting harder to go it alone.