On 25th Nov 2019, LVMH, the world leading luxury group spearheaded by the richest man in Europe, Bernard Arnault, announced that the company has entered into a definitive agreement to acquire the globally known luxury jewellery brand – Tiffany & Co. It was announced that LVHM will acquire Tiffany & Co. shared for US$135 per share in cash with an equality value of approximately US$16.2 billion.
The market received the news with glee and the deal was identified as a ‘game-changer’ especially keeping in mind the near-term performance of Tiffany & Co. The deal was much larger than the US$13 billion LVMH had offered for Christian Dior in 2017. With jewellery market growth outpacing other luxury sectors[i], this seemed a very good acquisition for LVMH and would relieve Tiffany & Co. from the financial challenges it was facing. Moreover, with Tiffany& Co. acquisition, LVMH would become the top luxury brand from a market shared perspective in the branded luxury market that was long dominated by the rival luxury group Richemnot with its brands like Cartier and Van Cleef & Arpels.[ii]
Reuters reported in Oct 2019 that LVMH had approached Tiffany & Co. with an initial offer of buying each share for US$120 per share valuing the company at US$14.5 billion. This represented 22% premium over the stock’s closing price, however, this was rejected by Tiffany’s shareholders as too low. The first salvo was on.
The news created the frenzy that Bernard Arnault expected and the share prices for Tiffany went up by 22.4% overall in the range of US$130. Analysts predicted Tiffany shares could trade between US$140-160.
Mr. Arnault, the master negotiator at the helm of LVMH since early 1990s, who has acquired companies all over the globe, was very much aware that the negotiation was going to be long and hard. The negotiation went on for a while with an informal increase in the offer close to US$130 per share, which led Tiffany & Co. to open its books. And then in end Nov 2019, the news emerged that both boards had agreed that LVMH will purchase Tiffany & Co. shares for $135 per share, a 37% premium over Tiffany’s share price. The deal was sweetened by almost US$600 million.
This sweetener was something the master negotiator would have liked to claw back in some ways. Moreover, in the current COVID-19 crisis, Tiffany continued to pay its dividend and kept paying its rents for its more than 300 stores. This, coupled with the 37% premium paid for the acquisition seem to have frustrated Mr. Arnault. However, with the legally binding agreement, it was going to be extremely difficult.
And so Mr. Arnault has just played a really interesting masterstroke in the past week that may work towards reducing this hefty premium for Tiffany’s share price. On 2nd June a speculative story appeared in the trade magazine that LVMH board had specifically met in Paris to discuss the Tiffany & Co. acquisition[iii]. With the deteriorating situation in the US luxury market and possibility of a global recession, the board was re-thinking the deal. On Thu 4th June, LVMH released a cryptic statement that it does not plan to buy Tiffany & Co. shares in the open market.[iv] Moreover, Reuters reported that LVMH was ‘exploring ways to reopen negotiations’.[v] With the news reported worldwide, Tiffany shared dropped about 10% overall by Thursday.
The murmurs and rumours I believe are driven with a particular aim, to create a sense of doubt among Tiffany shareholders regarding the actualization of the deal and reduce that price premium that has been agreed with a mutual consent from both LVMH and Tiffany.
Many shareholders especially those buyers who have bought the Tiffany shares with a quick profit in mind in the later part of last year and earlier this year with a hope to make a quick profit, would certainly be feeling pressure, especially if the deal collapses. Thus, they will be more inclined to agree to the deal at a somewhat lower prices than the original 37% premium. Anything is better than nothing, after all!