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Tiffany-LVMH Deal May Be Saved, Say Analysts
LVMH’s acquisition of Tiffany & Co. still has a chance, albeit at a lower price.
New York—LVMH’s acquisition of Tiffany & Co. is on shaky ground after the French luxury titan announced Wednesday it would be backing out of its agreement to buy the American jeweler.
Tiffany responded with a lawsuit to force LVMH to move ahead with the deal.
In its official statement issued last week, LVMH cited closing date issues after Tiffany requested a second extension and, it said, the French government asked it to hold off until January 2021 because of proposed U.S. tariffs on French luxury goods.
Tiffany countered that LVMH was looking for a way out of the $16.2 billion deal and breached the merger agreement by dragging its feet on securing the necessary regulatory clearances.
The deal recently received regulatory approvals from the Japan Fair Trade Commission and the Mexican competition authority, according to an 8-K filing with the U.S. Securities and Exchange Commission. It is still waiting for clearances from the European Commission and the Taiwan Fair Trade Commission.
LVMH said last week it plans to file its own lawsuit in response.
It called Tiffany’s lawsuit “totally unfounded” and claimed the jeweler had prepared it “a long time ago.”
After looking over Tiffany’s first-half results, the French luxury conglomerate called its perspectives for 2020 “very disappointing and significantly inferior to those of comparable brands of the LVMH Group during this period.”
LVMH said it would be challenging in court the way Tiffany’s management handled the COVID-19 crisis, noting that the company distributed “substantial dividends” when it was losing money and that its operation and organization are not “substantially intact.”
A long legal battle is likely ahead, but analysts aren’t ready to say the deal is off just yet.
“We’re not experts in French foreign affairs but we do believe that Tiffany & Co. remains an attractive target,” wrote Needham analyst Rick Patel in a note to investors shared with National Jeweler.
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The COVID-19 pandemic took a toll on Tiffany’s second-quarter results, Patel noted, but highlighted the retailer’s progress in China, digital, and its new product launches.
Those strategic areas were what LVMH was likely drawn to in the first place, he said.
However, the pandemic has led to lower retail valuations across the board, noted Patel.
The deal could go through if Tiffany is willing to lower its initial selling price of $135 per share, he said, but it’s unclear whether the jeweler is willing to do so.
Oppenheimer analyst Brian Nagel
“Our best estimate is that there now exists an 80-85% chance (down from 90%-plus) for a deal to occur at or above an acquisition price of $108/share (vs. a current offer of $135/share),” he wrote.
When talk of the deal first began, Tiffany confirmed it had received a bid for $120 per share, which would have valued the company at $14.5 billion.
Tiffany reportedly requested that LVMH up its bid to $130 per share. The final deal was for $135 per share, or $16.2 billion, one of the largest transactions in LVMH’s history.
A price reduction could salvage the deal, said Guggenheim analyst Robert Drbul.
“Considering the deal was initially negotiated in November 2019 (pre-pandemic), the deal could still be finalized, albeit at a lower price,” he wrote. “We continue to believe LVMH is the optimal buyer for Tiffany & Co., and Tiffany is a logical fit within LVMH’s portfolio of brands.”
LVMH said at the time that the addition of Tiffany could strengthen its position in the jewelry market and bolster its presence in the United States.
The acquisition would also give LVMH access to Tiffany’s vertical integration capabilities.
Tiffany established Laurelton Diamonds, a wholly owned manufacturing subsidiary, in 2002. It is a
De Beers sightholder and has also inked long-term rough supply agreements with Alrosa and Dominion Diamond.
The specialty jeweler also holds a stake in a diamond mine in South Africa owned by Canadian mining company Diamcor.
Analyst Patel also took a look back to November 2019, when LVMH first announced its acquisition plans.
In the first half of 2019, Tiffany’s business had slowed and its comps in the Americas were on the decline.
“At the time, Tiffany was known to be a self-help story that was investing in product innovation, marketing, digital and store renovation. In our view, the company remains a self-help story and is making progress on its growth initiatives despite the tough environment,” he wrote.
Looking at Tiffany as a whole, Needham lists an acceleration of same-stores sales in North America, higher-than-expected margins, and a successful introduction of new products as potential upside drivers.
Its risks include a weakening in the North American market, a greater-than-expected commodity inflation and a stronger U.S. dollar, which could hurt tourism.
Needham, Oppenheimer and Guggenheim all have a Hold rating on the jeweler.
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