What sent LVMH’s pursuit of Tiffany’s off the rails?
Despite the specter of additional US. tariffs against French goods come January, many believe that what French conglomerate LVMH Moët Hennessy Louis Vuitton is really angling for is better pricing on its deal to acquire heritage jeweler Tiffany & Co.
“Bottom line, I believe that LVMH will eventually own Tiffany,” said retail consultant Walter Loeb. “LMVH’s chairman Bernard Arnault likes Tiffany and he wants to own it, but he doesn’t want it at $16.2 billion. He wants to own it at some lower number.”
So what gives Loeb that feeling?
“It’s the way they released their statement, the way they backed out of the deal ‘as it stands.’ That gives me an idea in their phrasing that they tried to show that they’re still interested,” he added.
In a Sept. 9 statement, LVMH said its decision came about “after a succession of events” that prompted the board to review the situation. And “as a result of these elements,” the conglomerate couldn’t currently complete the acquisition “as it stands,” it added.
Those elements include a letter from the French European and Foreign Affairs Minister Jean-Yves Le Drian asking LVMH to delay its acquisition of Tiffany to beyond Jan. 6, as well as Tiffany’s request to extend the merger agreement’s deadline of no later than Nov. 24, to sometime between Nov. 24 to Dec. 31. LVMH and Tiffany inked their merger agreement last year on Nov. 24.
It wasn’t a surprise that Tiffany responded by filing a lawsuit against LVMH to enforce the merger agreement. Tiffany has alleged breach of obligations under the contract, and disputed LVMH’s claim that it can call off the deal because it concluded that the luxury jewelry retailer has undergone a “material adverse effect.” Specifically, Tiffany said the material adverse clause is narrowly defined, and that the impact from the coronavirus and the social justice protests sweeping America “cannot even be taken into account in determining” whether that provision in the merger agreement has been triggered.
“Tiffany is confident it has complied with all of its obligations under the Merger Agreement and is committed to completing the transaction on the terms agreed to last year. Tiffany expects the same of LVMH,” Roger N. Farah, Tiffany’s chairman, said last week.
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LVMH in turn fired back with a lawsuit of its own against Tiffany.
Last week, LVMH chief financial officer Jean Jacques Guiony referred to the Le Drian letter as a “governmental order” and that the company had “no other choice” but to honor it. Whether such a letter constitutes an order from the French government is debatable.
On Monday, French Finance Minister Bruno Le Maire skirted any specific comment on whether the French government should have intervened in the cross-border deal. But in an interview with France 2 television, he noted that Le Drian, in writing the letter, made a “decision that seemed right to him” and that “it’s his role” to take “all measures he deems necessary to protect French interests.” Le Maire went on to detail plans for a digital services tax, which is at the heart of the U.S.-French trade dispute. The dispute centers on a tax on internet services by foreign entities, such as Amazon, Apple, Facebook and Google, a similar matter several European nations are considering or have already implemented.
Regardless of what happens with the ongoing trade dispute, Loeb isn’t the only one who believes a deal is still possible, albeit at a lower price.
Cowen & Co. luxury and retail analyst Oliver Chin pegs a 15 percent to 25 percent probability that the LVMH-Tiffany deal goes through at $135 a share, and a 20 percent to 30 percent chance that the deal breaks. More important, he has a 50 percent to 60 percent probability that the deal gets completed at a reduced price tag of $120 a share.
“We believe long-term synergies remain significant and a deal is most likely to close at a reduced price of $120 to $130; however, geopolitical risk could call the deal off, and this is a new and relevant factor,” Chen said.
Ion-Marc Valahu, a fund manager at Geneva-based firm Clairinvest, told Reuters Monday that LVMH was using the French government as an excuse. “[S]eeing what’s happened with COVID, and the fact that no-one is going out shopping…they may be looking to see if they can get Tiffany at a lower price,” Valahu added.