Tiffany That Hasn'T Been Sold: Lost To The Epidemic? Tariff? Or Benefit?

On September 9, the French luxury giant LVMH group announced in a statement that the board of directors of LVMH would not be able to acquire Tiffany & Co., a well-known jewelry and luxury brand in the United States "as it is" due to a series of recent transaction disruptions. This means that the world's largest luxury purchase between LVMH group and Tiffany at a high price of $16.2 billion in November last year was officially terminated. LVMH said that part of the reason for the termination of the transaction was the tense trade situation between the United States and France. It received a notice from the French Ministry of foreign affairs requesting that the review of the transaction be postponed beyond January 6, 2021. Tiffany responded by saying that it had filed a lawsuit with the Delaware court, asking the court to require LVMH group to comply with its contractual obligations to complete the transaction. On the day of the news, Tiffany's share price fell by more than 10% at one time, while LVMH group's own share price was affected only slightly by 0.9%.

The acquisition of LVMH and Tiffany was terminated. Picture green

"Shaky" deals

It does not seem surprising that LVMH suddenly announced the cancellation of Tiffany's acquisition, because the fate of the deal, both before and after the deal, depends on the actual share price and whether LVMH believes that the acquisition of Tiffany at such a high price is still a "worthwhile" investment.

Hard luxury, represented by jewelry and watches, is currently the weakest Department of LVMH group, and has been unable to compete with Richemont group, which is the leader in the field of hard luxury. With a history of 183 years, Tiffany has enjoyed a good reputation in the high-end jewelry brand queue with its stable performance, high-end market positioning and high-quality products. But faced with the problems of aging brand and shrinking market, Tiffany is also trying to break through the bottleneck by accelerating the younger marketing. In order to strengthen the group's development territory and expand its market share in North America, LVMH group and Tiffany, which is seeking to update resources and development opportunities, met the "official announcement" on November 25 last year: LVMH group will purchase Tiffany at a cash price of 135 US dollars per share, with a total transaction price of about US $16.2 billion. After the deal, LVMH even changed its official website into the classic Tiffany blue, while Bernard Arnault, LVMH's president, praised Tiffany for "flourishing for several centuries", believing that it was quite suitable for its various brands.

However, soon after, the new crown pneumonia epidemic swept the world, bringing a round of "tsunami" to the luxury industry. Although the $16.2 billion agreed purchase price is still affordable for LVMH, which has a market capitalization of more than 210 billion euros, it seems that LVMH is more keen to pay the "right" price.

The first sign of repentance was in March this year. As a result, the deadline from the end of April to the end of this year will be postponed to the end of October by Australia's regulatory authorities. At that time, it was rumored in the industry that the stock price of Tiffany had dropped to US $129 per share due to the impact of the epidemic. LVMH group might consider buying Tiffany's shares in the open market at a lower price. However, considering that the move may face legal obstacles and endanger the credibility of Bernard Arnault, President of LVMH, in the business world, LVMH group made a statement at that time, promising not to buy Tiffany shares from the open market.

In June, as the global epidemic situation and demonstrations in the United States intensified, the situation in the luxury retail industry was grim, and the skyrocketing acquisition case became increasingly variable. LVMH held a board meeting on June 2 to formally discuss whether it should renegotiate with Tiffany to reduce the purchase price. Bernard Arnault, the president of LVMH group, even considered whether it could restart the negotiation on the ground that Tiffany had violated the acquisition agreement between the two parties, the women's Wear Daily reported. After the news broke out, Tiffany's share price fell by more than 11% on the same day, falling 8.98% to 116.97 US dollars by the end of the day, nearly 20 US dollars from the purchase price of US $135 per share. Tiffany believes that LVMH group has no legal basis to restart the negotiation, because Tiffany has always complied with the relevant provisions in the merger and acquisition contract. According to an interview with people familiar with the financial times, it is difficult for LVMH group to renegotiate the price or terms given the legal basis of the acquisition. According to the terms of the agreement, LVMH group or Tiffany can withdraw from the transaction only if one party pays the other $575 million in compensation. Although the LVMH group did not formally decide to make any decision at that time and did not communicate with Tiffany on the matter of renegotiation, it has clearly released the signal of reconsidering the acquisition.

Failure in business, constant criticism

Bad news comes out once every three months, which seems to be a rule of the deal. The ultimate bad news of "giving up the deal" brought by September has made the two brands directly fall into a curse fight and get involved in a series of legal lawsuits.

According to reports, the United States announced in July that it would impose a 25% tariff on French goods, including leather bags and cosmetics, starting from January 6, 2021. Therefore, the French foreign minister sent a letter to LVMH group asking it to postpone the acquisition after January 6 to support the French government's Countermeasures against the United States. As the original deadline of LVMH and Tiffany agreement was November 24, 2020, and previously Tiffany also said that it is better to postpone the completion of the transaction to December 31, this year. Considering that the date has been changed many times and the current situation is complex, the transaction basis has been weakened, LVMH group announced to abandon the acquisition.

As soon as the news came out, Tiffany immediately attacked LVMH and accused LVMH of "dirty hands" and stopped the transaction with the help of the French government, and pointed out that LVMH group was secretly deliberately delaying the anti-monopoly approval process, and the trade dispute between the United States and France was just an excuse. According to people familiar with the matter, the French government's notification letter is not mandatory. The two letters are completely different in nature. Tiffany chairman Roger Farah said that, as far as he knew, only the LVMH group had a so-called "notice" for this transaction, while other enterprises had no such transaction at all. "We believe that the LVMH group is seeking to use any possible means to avoid completing the transaction in accordance with the terms of the agreement," he said in a statement As a result, Tiffany filed a lawsuit to force LVMH group to complete the acquisition according to the agreement, and hoped that the court would make a ruling before the original November 24 transaction date.

In the face of the crisis, Tiffany, as a company, responded to the crisis in September. Jean Jacques guiony, LVMH's chief financial officer, has repeatedly reiterated that the group is legally required to comply with government demands, and that Tiffany's charges against LVMH are totally unnecessary and LVMH does not have to pay additional fees for the termination of the transaction. He believes that Tiffany's current performance and development prospects are obviously inferior to LVMH group's comparable brands, and criticizes its improper operation. He even insists on paying dividends even in the case of losses. Fashion media nofashion commented that Tiffany approved a quarterly dividend of US $0.58 per share in May and August, while LVMH cut its annual dividend by as much as 30% in fy19. Tiffany's dividend payment was indeed contrary to the practice of many peers during the epidemic. In a TV interview on September 14, French finance minister Bruno le Maire also defended French Foreign Minister Jean Yves Le Drian's involvement in the deal. He believed that the French Foreign Ministry's letter asking LVMH to postpone the acquisition plan beyond January 6, 2021 was the right decision: "the responsibility of the foreign minister is to take all measures he considers necessary to protect the interests of France."

More than 50% price reduction possible

For Tiffany, in addition to the legal battle to be opened with LVMH in the future, there are also a series of disturbing prospects: the merger and acquisition may eventually be completed at a discount price lower than before; perhaps Tiffany has not been acquired, but needs to find another good owner in a market full of more uncertainty.

According to public data, Tiffany had net sales of $556 million in the first quarter as of April 30, a year-on-year decrease of 45%; as of July 31, the decline of net sales in the second quarter narrowed to 29%, and it has realized profits again, and is expected to achieve profits higher than that of the same period last year in the fourth quarter of this year, and its financial situation continues to improve. Luca Solca, head of luxury research at Bernstein, told Fashion Business Review: "the direction of this incident is not entirely unexpected. Many companies have reassessed the previous acquisition agreements because of the new crown pneumonia epidemic. But Tiffany is still a valuable acquisition target, and if the dispute between the United States and France is resolved, it is still possible for the two sides to reach an agreement in the future. "

However, LVMH group's own performance has been hit by the epidemic. As of June 30, the first half of 2020's sales revenue fell by 27% year-on-year, of which the decline in the second quarter was deeper than that in the first quarter. For LVMH group, in the current downturn in the luxury market, if it still insists on spending a lot of money to bring Tiffany under its command, considering the debt problem still to be solved, it is not the best choice. "LVMH will either close the deal or seek a price cut," UBS analyst zuzanna pusz told fashion business review Analysts surveyed by Bloomberg law predict that the possibility of a deal between the two sides is still as high as 65%, but Tiffany will need to make a 10% - 20% discount from the previous price of $135 a share, and the new transaction price is expected to be between $100 and $130.

Luca Solca analyzes that if trade tensions are eased and the US presidential election is held in November, the two companies may reopen negotiations in the new year. "Even if the deal fails completely, luxury goods giants such as Kaiyun group and Richemont group may choose to bid for it," he said

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