LVMH and Tiffany: What Went Wrong?
On November 25th 2019, Louis Vuitton Moët Hennessy (LVMH) announced they had reached an agreement to acquire luxury jewellery brand Tiffany and Co. The all-cash deal which valued Tiffany at $135 per share would result in a transaction with an equity value of $16.2 billion. [1] However, after twice missing the completion date, LVMH announced in a dramatic turn of events on September 9th 2020 that they were pulling out of the deal, citing threats of U.S. tariffs on French goods. [2]
History of the Two Brands
LVMH are a French multinational corporation focusing on luxury goods. They were formed between the merger of Louis Vuitton and Moët Hennessy in 1987, and now boast the largest market capitalisation in France. [3] Listed on the Euronext Paris exchange and a constituent of the CAC 40 index, the group reported a 2019 revenue of $62.8 billion, employing around 145,000 worldwide. [4]
Tiffany and Co are an American jeweller and specialty retailer headquartered in New York, USA. Dating back to 1837, the company has grown tremendously and are today known as one of the most iconic brands in the industry. Employing 14,000 staff worldwide, Tiffany and Co. reported revenues of $4.44 billion in 2019 and are a constituent of the S&P 500 index. [5]
Since the late 1990s, the luxury goods market has continuously grown, valuing $308 billion by 2019. Nonetheless, the current COVID-19 pandemic has created significant challenges for this lucrative market that is usually resilient to economic downturns. As of 2019, China accounted for a mammoth 90% of the market’s growth but, with a worldwide recession at our hands, consumers are holding out on luxury purchases. Recent estimations predict a massive 30% slump in the luxury goods market, with a best-case scenario of normal sales volumes in 2022 for developed markets. [6]
The Proposed Deal
The agreement that would have seen LVMH paying the full $16.2 billion in cash was expected to complete in mid-2020, subject to regulatory approvals. All the required approvals were satisfied and the Tiffany shareholders accepted the offer.
The twice delayed deal was eventually called off in September 2020, with Tiffany threating to sue LVMH if they failed to commit to the deal. In a statement released by Tiffany and Co, they accused the French multinational of deliberately stalling to avoid completion of the deal and heavily questioned the rationale behind LVMH pulling the plug on the transaction due to trade tariff disputes. Tiffany’s chairman Roger Farah said they “regretted” having to take litigation action but insisted it was required to “protect our company and shareholders.” [7]
Announcing the deal in 2019, Bernard Arnault, Chairman and Chief Executive Officer of LVMH, commented: “We are delighted to have the opportunity to welcome Tiffany, a company with an unparalleled heritage and unique position in the global jewellery world, to the LVMH family. We have an immense respect and admiration for Tiffany and intend to develop this jewel with the same dedication and commitment that we have applied to each and every one of our Maison’s. We will be proud to have Tiffany sit alongside our iconic brands and look forward to ensuring that Tiffany continues to thrive for centuries to come.” [8]
This deal is of critical strategic importance to Tiffany’s growth and development over the coming decades. Tiffany has failed to modernise their offerings over recent years, whilst their sales have been challenged by US trade wars within the Asian region, notably China. New management and direction utilising LVMH’s expertise and capabilities would help them to solidify their brand and improve the resilience of their product offering and business model. As for LVMH, acquiring Tiffany and Co. would have helped the conglomerate strengthen their jewelry offerings as they continue their conquest of luxury goods acquisitions. [9]
Financials
The last five years have been mixed for the involved companies. Tiffany and Co have seen their share price vary substantially in recent times, reaching a low of $60 in June 2016 before gaining strong momentum in the lead up to the announcement of the deal. On the day of the deal, the share price was sitting at the $130 mark.
With revenues remaining relatively flat over the 5-year period it was beginning to become clear that the company was in need of change if they were to expand and remain strong within their offerings.
Concerningly, Tiffany had seen net margins decrease to below the 10% threshold in the lead up to the deal, coupled with US sales on a downward trajectory. This has made the next business steps critical to success. [10]
Meanwhile, the picture for LVMH was very different. Over the previous 5 years the French giant has seen their share price more than double from €150 per share to €400 per share when the deal was announced. In the same 5-year period, LVMH have reported a 50% increase in revenue and greater market share as they have risen to become the world’s most valuable luxury brand. [11][12]
Despite originally offering a valuation of $120 per share for the purchase of Tiffany, LVMH agreed to increase the offering to the agreed $135 per share.
Without question, LVMH believed in the Tiffany brand at the time and were happy to pay a premium. However, as time progressed and the market conditions worsened the management of LVMH felt the need to reconsider the deal. Whilst they claimed that the French government had ordered them to pull out their offer, there is no question that the spread of COVID-19 and gradual market downturns within the sector were extremely influential to this change. [13]
Conclusion
The decision by LVMH to pull out of the acquisition of Tiffany and Co. is one which has been debated over recent months. After stalling on approaches to reduce the valuation of Tiffany and twice extending the deal deadline, LVMH argued that the context of COVID is an unpredictable disruption and changed the nature of the deal, leaving Tiffany overvalued. They even went as far as describing Tiffany as a ‘mismanaged company with dismal prospects.’ [14] Some argue, however, that these circumstances have affected all businesses and should not change the previously-agreed deal.
Without any doubt, Tiffany will argue this deal was agreed and approved in a pre-Covid era and are likely to stage a strong litigation claim which will be fiercely watched by the market. The court may sympathise with Tiffany, as they are honouring their contract, although it is uncertain who will come out on top. One clear outcome is that the economic downturn and poor recovery projections in the luxury goods market, coupled with the risk of heightened tariffs between the EU and USA, warns of challenging times ahead, even for the most premium of brands. [15] If the deal does fall through, Tiffany’s management will be bitterly disappointed, especially after securing their strong premium. They would be left to formulate a plan to organically modernise and redesign the out of favour luxury brand. [16]
As for LVMH, rest assured they will be looking for potential ways of re-entering the luxury goods market in the long run, and will be seeking better deals with the newly-suppressed company valuations going forward. [17]