Diamonds are Arnault’s best friend: reassessing the LVMH-Tiffany’s acquisition

Wednesday 10th June 2020

The luxury industry’s biggest deal ever – LVMH’s $16.2 billion offer for US jeweller Tiffany & Co. – is suddenly looking a lot less certain.

The French luxury giant agreed to buy Tiffany’s for $16.2 billion back in November; a deal that would provide growth potential for LVMH in China, Asia’s largest economy.

It is understood that board members of the luxury giant are now concerned about the impact of not only the coronavirus pandemic, but also growing unrest in Hong Kong.

So far, the coronavirus outbreak has seen the abandonment of a number of previously agreed deals such as Xerox’s $35bn hostile bid for HP, the merger of equals between Woodward and Hexcel and the deal to sell Victoria’s Secret to private equity group Sycamore Partners.

LVMH board members are also concerned about Tiffany’s ability to cover all its debt covenants at the end of the transaction, which was expected to be concluded mid-year.

This is significant, because if Tiffany missed a debt payment it would potentially open up the merger contract to renegotiation.

While no firm decision has yet been made by LVMH, the board has sent a clear message that the acquisition should be reconsidered.

Options for LVMH

LVMH has been historically known for its successful long-term M&A track record as the sector’s largest consolidator.

As such, investment bank UBS see any potential decision to reconsider the deal to bear a negative impact for the luxury sector overall, leading to the industry’s recovery post-pandemic taking longer than expected as well as creating reputational risks.

LVMH, whose CEO is the world’s third-richest man Bernard Arnault, is locked into an iron-tight merger agreement that does not even give them the chance to walk away from the deal by paying a break fee.

LVMH’s only way out of the deal runs through the Delaware Chancery Court, where it would need to prove that the target has breached the merger agreement or rely on the Material Adverse Change clause.

It would also likely force Arnault to take the stand and be probed about his history, and for a man whose career is built on clever deal-making, earning him the nickname ‘the wolf in cashmere’, that is not a position in which he would like to find himself.

Alternatively, LVMH could acquire stock in Tiffany’s on the open market, trading at approximately $122 at the time of writing, down from the current offer price of $135. However, this has been explicitly ruled out by the board.

As a result, LVMH are trying to give themselves leverage in the negotiation. Firstly, with a well-timed story in financial publications about concerns over the deal among its board, backed up with an official statement. The objective is to sow doubts among Tiffany’s shareholders that the deal is becoming increasingly uncertain.

Those investors, including many hedge funds who are arbitraging the spread between Tiffany’s current share price and the $135 offer, would then apply pressure on Tiffany’s board to ensure that a deal is done even if it means accepting a reduced price.

The strategy appears to be working, as Tiffany’s stock price dropped approximately 10% following the board’s statement.

However, Credit Suisse does not believe that Tiffany’s long-term earning power has changed because of near-term, COVID-related pressures, and thinks that it would be short-sighted for LVMH to point to near-term impacts to avoid a deal (and that any attempt to back out could affect LVMH’s credibility in future transactions).