LVMH’s breakfast at Tiffany’s with the bill of $16.2 billion


LVMH Group will acquire Tiffany & Co, an American jeweler known for engagement rings and white diamond necklaces, for $ 16.2 billion with $135 per share, the biggest deal in luxury industry. 

About the Buyer: LVMH Moët Hennessy Louis Vuitton

The buyer of this deal is LVMH Moët Hennessy Louis Vuitton, the world’s leading high-quality product group, which recorded revenues of €12.5 billion in the first quarter of 2019, with an increase of 16% against previous year.

LVMH is a French international luxury goods group. The group was founded in 1987 as a result of the merger of Louis Vuitton and Moet Hennessy. Moet Hennessy was formed in 1971 by the merger of champagne maker Moet & Chandon and cognac maker Hennessy. Its businesses are divided into wine and spirits, fashion and leather, perfume and cosmetics, watches and jewelry, retail and hotels. The company has about 70 brands and more than 3,950 stores worldwide. It produces distilled and sparkling wines from different regions, as well as whiskey. The fashion and leather business groups include Louis Vuitton, Fendi, Donna Karan, Loewe, Marc Jacobs, Celine, and Edun. It specializes in perfumes, cosmetics, and skincare and offers a range of brands such as Dior, guerilla, and Kenzo. The watch and jewelry industry is divided into two parts: high-quality watchmaking, jewelry, and high-quality jewelry. Its selection of retail operations is based in Europe, North America, Asia, and the Middle East.

In millions of EUR

About the seller: Tiffany&Co 

The seller is Tiffany&Co, a holding company that operates through its subsidiary companies. The Company’s principal subsidiary, Tiffany and Company (Tiffany), is a jeweler and specialty retailer. 

Founded in 1837 by Charles Lewis Tiffany and John B. Young in Brooklyn, Connecticut, as a “stationery and fancy goods emporium”, the store initially sold a wide variety of stationery items and operated as “Tiffany, Young, and Ellis” as of 1838 at 259 Broadway in Lower Manhattan.

The Company’s segments include Americas, Asia-Pacific, Japan, Europe and Other. Through its subsidiaries, the Company designs and manufactures products and operates TIFFANY & Co. retail stores around the world, and also sells its products through Internet, catalog, business-to-business and wholesale operations. The Company also sells timepieces, leather goods, sterling silverware, crystal, stationery, fragrances, and accessories.

Tiffany’s merchandise offerings include an extensive selection of jewelry (92% of worldwide net sales in fiscal 2018), as well as timepieces, home and accessories, and fragrances.

In millions of USD

Buyer’s rationale of the deal: 

  • Consolidate U.S market as well as getting a strong presence in America  

Louis Vuitton leather factory was announced to open last month in Texas. The goal of the Paris-based brand’s newest factory is straightforward: in its own words, the new manufacturing hub will help Louis Vuitton “to meet the ever-growing demand for Louis Vuitton products in America.” As the Wall Street Journal put it, the new factory is part of Louis Vuitton’s larger strategy of “selling luxury goods to the masses without lowering prices.” Besides, acquiring Tiffany helps the group to grow its smallest business, give it a bigger share of the lucrative U.S. market and expand in jewelry, the fastest-growing sector in the luxury goods industry. LVMH’s latest American endeavor gives the ability to “hedge against the risk of trade disputes between the U.S. and European Union”, under the watch of President Donald Trump. 

  • Get access to the core expertise and well-known brand in the jewelry industry  

The jewelry is reported to grow 7% since this year and is rated as one of the fastest-growing sectors in the luxury industry. Since LVMH’s acquisition of Bulgari, its sales have been doubled and sustain LVMH’s organic growth in the jewelry world widely. 

Acquiring Tiffany aligns with LVMH’s ambition to actively pursue its market share growth target by constantly monitoring markets and remaining highly selective in its allocation of resources. 

For LVMH, the deal will give the world’s largest luxury goods company a more prominent name in fine jewelry and make it a leading company in the U.S. The deal also comes as demand for diamonds globally is going through a resurgence.

By getting access to the core expertise and strong and established brand brought by Tiffany, LVMH can build a more modern and adapted portfolio than LVMH currently proceeds to better serve the millennials in the booming luxury market in the next years.  

Besides, the deal is also projected to increase LVMH’s market share up to 20% in the jewelry sector as much as its primary competitor Richemond, which holds Cartier under its name. 

Seller’s rationale of the deal:

  • Increase innovation of the product under the LVMH environment and sustain long-term development 

Tiffany has been criticized for its lack of innovation during recent years compared with its major competitor: French luxury brand Cartier, which invests more in young consumers. Cartier’s parent company Richemont’s jewelry business is headquartered in Switzerland, and its operating margin is about twice that of Tiffany. Tiffany logged 10 quarters of either flat or negative same-store sales growth between the fourth quarter of 2014 and the third quarter of 2017. The deal could allow Tiffany to update its products and help it to grow overseas.

Bernard Arnault, the chief executive officer of LVMH, has handled a number of other luxury brand acquisitions, including the acquisition of Italian jewelry brand Bulgari and he expected to help Tiffany in expanding beyond the Americas.

  • Get a grip of opportunity in China 

Tiffany has also been fluctuating with the global diamond industry for some time, and demand for jewelry has declined. But jewelry sales have begun to rebound, thanks to the strong U.S. economy, China’s strong demand to buy diamonds for themselves and more from millennials in China, according to consulting firm Bain & Co.

China is reported to be the world’s largest luxury goods consuming market. Tiffany currently only has 35 stores in China and benefits from the strategy to rely on Chinese consumers going abroad. With the rally between the U.S and China Trade war, this strategy may no longer apply ,and Tiffany now is losing its presence in mainland China as a result of the lack of marketing.

From Tiffany’s perspective, we can see the access to capital, global and high luxury expertise is likely to boost Tiffany’s transition considerably.

Deal structure  

LVMH will buy Tiffany & Co. for $135 a share, a deal that would value the company’s overall stake at $16.2 billion. Including net financial liabilities of $700m, that would give Tiffany an implied enterprise value of $16.9bn, making LVMH’s biggest-ever acquisition and largest deal in luxury history. 

The deal represents a 37.0% premium to the deal price of $98.55 per share on LVMH’s last trading day, October 25, 2019. This also reflects a 12.5% increase over LVMH’s initial offer of $120 per share on October 28, 2019.

Since LVMH first made its $120-a-share offer on October 28, 2019, Tiffany’s shares have jumped to $130 immediately after the initial announcement and have stayed well above the $120 mark ever since. This implies that investors are betting on the fact that an improved offer from Louis Vuitton or a rival bid will be made on Thursday, November 21, amid rumors that LVMH has been granted access to confidential financial information by Tiffany & co. Tiffany’s shares rose 3.1 percent to $127.18 after the speculation.

At the suggestion of Goldman Sachs and Centerview Partners, Tiffany’s board has sought to keep it a secret since it was first approached by LVMH. The directors did not comment publicly on the value of the $120 offer, advising shareholders not to act. Talks with LVMH have been accompanied by discussions with other potential suitors as part of a review of strategic options, but no one seemed ready to make a better offer. They backed LVMH’s $135-a-share offer on Monday morning.

The deal values the 321-store luxury jeweler at 16.6 times EBITDA for the year to January 31, 2019. It will also trade at 27.8 times earnings, or $4.86 per share for the year ending Jan. 31, 2020, according to consensus estimates.

This is very much in line with LVMH’s own forward price/earnings ratio of 27.0 for the full year 2019, which is slightly higher than Richemont, meaning that LVMH is effectively offering a full price for Tiffany.

LVMH will use the bond markets to finance its biggest-ever acquisition, raising some new debt facilities, including an $8.5bn bridge loan, a $5.75bn commercial paper support line and a €2.5bn revolving credit facility. These debt arrangements will later be refinanced by LVMH through a bond issue. Nevertheless, the impact on LVMH’s overall debt leverage remains limited. The French group’s EBITDA for FY19 is estimated to exceed 14 billion euros. 

Market reactions & Expectations in long-term 

On Monday evening, Tiffany’s shares closed at $133.25, just below their offering price. This clearly means that investors now believe the buying will continue. However, conditions remain on the deal, including formal approval by Tiffany shareholders at the general meeting and regulatory approval, including antitrust. The process could take months and is expected to be completed by mid-2020. Still, investors welcomed the offer: LVMH’s shares rose 1.5% on Monday. The deal should have a slightly stronger impact on LVMH’s earnings per share in 2020 when its net debt to EBITDA ratio will be close to 0.9 times.

 LVMH Share Price – 18/12/2019
Tiffany Share Price – 18/12/2019

The acquisition would give LVMH a 20 percent share of the global jewelry market, “very close” to Richemont. Given Tiffany’s U.S. sales (44 percent), LVMH’s U.S. sales will rise from 23 percent to 26 percent.

Advisors 

Citi and JP Morgan Chase acted as financial advisors, and Skadden, Arps, Slate, Meagher & Flom LLP served as legal counsel to LVMH.
Centerview Partners LLC and Goldman Sachs Co. LLC acted as financial advisors, and Sullivan & Cromwell LLP served as legal counsel to Tiffany.

Author: Gaochang Tian

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