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LVMH in Talks With Tiffany

By Paul Whitfield

LVMH Moet Hennessy Louis Vuitton SE is considering tying the knot with storied ring maker Tiffany & Co. (TIF).

“The LVMH Group confirms that it has held preliminary discussions regarding a possible transaction with Tiffany,” the world’s biggest luxury goods maker said on Monday, Oct. 28, confirming reports of early stage talks but declining to comment on the price of an offer reported to be about $14.5 billion.

LVMH has offered to pay $120 per share for the New York-based jeweler, a 22% premium to the target’s closing share price on Friday, Oct. 25, according to Bloomberg, which first reported the talks on Oct. 26.

“LVMH’s watches and jewellery division is the area where the group demonstrates least scale relative to its other segments (fashion & leather, wines & spirits etc),” Goldman Sachs analysts including Louise Singlehurst and Alexandra Walvis noted on Monday. “Any deal of this nature would be about LVMH’s ability to drive higher sales at Tiffany rather than cost savings opportunities.”

LVMH’s courtship could prove a bumpy one. Tiffany will reject the offer as too low the Financial Times reported on Sunday, citing people familiar with the matter.

LVMH’s offer will have to win over Tiffany directors including Chairman Roger Farah, James Lillie and Franceso Trapani, each of which took up their seats as part of a 2017 agreement with activist investor Jana Partners LLC, which succesfully campaigned to overhaul the specialty retailer’s board. Jana still owns about $7 million of Tiffany stock, or less than 1%, having sold down an earlier 5.1% holding accrued in support of its campaign.

The French maker of Bulgari watches, its biggest jewelry brand by sales, has the fire power to return with a bigger offer, should it see value in the deal. LVMH has a market capitalization of €193 billion ($214 billion), net debt just 0.4 times forecast 2019 Ebitda and annual free cash flow of about €6.7 billion. Goldman Sachs estimates that LVMH will have net positive cash of about €3 billion by 2020, a position at odds with its historical preference to maintain some leverage on its balance sheet.

LVMH has been a regular buyer of luxury assets, but has turned its attention to some more unusual targets in recent years, most recently securing a $3.2 billion deal for luxury hotel and travel group Belmond Ltd.

A deal for Tiffany’s would rank as the biggest ever acquisition by LVMH, which is led by founder, Chairman and Europe’s richest man Bernard Arnault. It would also provide the group with an iconic brand, with 182 years of history, its instantly recognizable Tiffany Blue boxes and a business model that ties in to LVMH’s preference for an inhouse retailing operation.

Tiffany sells more than 99% of its products, excluding some perfume and eyewear sales, through its own stores. LVMH’s largest luxury goods brand Louis Vuitton is sold exclusively through a 100% owned store network.

LVMH is treading a familiar path both in terms of its approach and the people it will be dealing with as it seeks to secure a deal for Tiffany. The target has been led by CEO Alessandro Bogliolo since 2017. Bogliolo was COO of Bulgari in 2011 when LVMH secured a €3.7 billion cash and share deal for the Italian jewelry maker. Bulgari’s then CEO Francesco Trapani is now a significant minority shareholder in Tiffany.

“All large luxury groups are likely to get involved in acquired growth as the sector slows down toward its ‘normalized’ 6% growth rate, there is a limited pool of opportunities,” Jefferies analysts Flavio Cereda and Kathryn Parker wrote on Monday. “TIF is potentially the biggest prey and the only US global luxury brand.”

A deal would about double LVMH’s size and profitability in the so-called hard luxury sector, which includes jewelry and watches, increasing sales to about €9 billion and Ebit to €1.5 billion to €1.6 billion.

Jefferies also noted that a bid for Tiffany would likely end speculation that LVMH could be planning an even larger offer for luxury brand Chanel, which is owned by the Wertheimer family.

Tiffany is taking financial advice on the offer from Centerview Partners LLC’s Blair Effron and Tony Kim and Goldman Sachs’ Tim Ingrassia and Olga Lewis. Tiffany tapped Sullivan & Cromwell LLP’s Frank Aquila and Melissa Sawyer for legal advice. LVMH is taking financial advice from Citigroup Inc. and has turned to Skadden, Arps, Slate, Meagher & Flom LLP for legal counsel.

LVMH shares traded in Paris on Monday morning at €384.45, marginally higher than their Friday close.