LVMH & Tiffany & Co: Collapsed Merger
What’s the background?
In November 2019, the billionaire chief executive of LVMH, Bernard Arnault, had agreed to pay $135 per share to acquire Tiffany & Co, a 37 per cent premium to Tiffany’s share price at the time. The takeover deal would be the largest in the luxury sector to date if it were to go ahead.
Tiffany & Co, which rose to global fame after the 1961 Audrey Hepburn film ‘Breakfast at Tiffany’s’, would’ve made strategic sense in LVMH’s portfolio. LVMH had historically made the majority of its profits from what is known as ‘soft luxury’ goods such as Louis Vuitton handbags and apparel. ‘Hard luxury’ goods such as watches and jewellery only accounted for 8 per cent of LVMH sales. However, prior to the Covid-19 pandemic, the ‘hard luxury’ sector had been expanding faster than ever, growing at a compound annual rate of 6 per cent from 2010 to 2019 as noted by Bain.
Therefore, the LVMH’s $16.2 billion takeover of Tiffany was justified and deemed very profitable before the coronavirus hit.
What’s happening?
On Tuesday 8 September 2020, LVMH’s legal team revealed to Tiffany that the French foreign minister had asked it to delay the closing of the Tiffany acquisition until January 6. The letter from the foreign minister had apparently cited Donald Trump’s decision to implement customs duties on certain French industries, including luxury goods, in reaction to France taking on a digital services tax.
Under the merger agreement in 2019, LVMH is not required to close the deal if there is an ‘order’ from the French government. Furthermore, LVMH stated that it had was obliged to comply with what they believed to be a legal order from the government and therefore would be unable to complete the acquisition before the merger agreement expired on November 24. However, French officials have since disputed that the letter was a binding request hence leaving LVMH room to freely operate.
As a result, Tiffany has filed for a lawsuit accusing LVMH of purposely delaying matters, including delaying antitrust filings and using “any available means” to avoid closing the transaction.
Why is this happening?
LVMH has stated that the trade spat between France and the US as the reason for the merger being unable to go ahead. However, there may be more factors at play.
One major issue is that of the pandemic affecting luxury good sales. With sales of luxury goods are set to contract up to 35 per cent after the coronavirus pandemic with a recovery not expected before 2023, LVMH has been looking for a way to renegotiate the deal for a cheaper price. The pandemic has hit tourism, a key driver of luxury retail, very hard which alongside with the long-term decline in marriage rates, has lowered the demand for jewellery.
In particular, Tiffany’s same-store sales has been down 44% following the pandemic. As a result, LVMH has been doubting the profitability of the deal with investors worrying overpaying.
What does this mean for the future?
The future is in the hands of a legal battle. The outcome of the legal process is uncertain especially due to the pandemic. LVMH has since argued that the implications of Covid-19 can be considered as ‘material adverse change’ which would, in turn, affect the merger agreement. However, enforcing these ‘MAC’ clauses has proven difficult for companies in takeover situations in the past.
Furthermore, LVMH has bolstered its case by claiming that Tiffany has been mismanaged which has violated the terms of the deal. The French conglomerate has also planned to file for EU regulatory approval which may undermine Tiffany’s argument that the firm is deliberately delaying the process. It has been also observed that LVMH appears to be willing to complete the transaction at a lower price.
An important factor of the case is whether the letter from the French government is indeed an ‘order’. It is to be noted that Tiffany has dismissed the letter as ‘mere pretext’ for LVMH to get out of the deal.
If the deal goes down, the failed merger would be second-largest to fail this year.
By Bobby Zhu