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The Rocky Relationship of LVMH and Tiffany & Co.

Background

Divorce rates amongst couples around the world have spiked during the pandemic and now it seems the trend is spilling over into corporate marriages. In November 2019, an announcement detailing the proposed acquisition of Tiffany & Co. by luxury goods giant LVMH for $16 billion was released, in what would be the largest deal the industry had ever seen. The deal had mutual benefit: it would pull Tiffany from its recent slump, strengthen LVMH’s exposure in the U.S. market and help it to become a major player in fine jewellery, an area where analysts say the luxury goods giant is lacking. It was a match made in corporate heaven…

Trouble on the horizon

That was before the pandemic caused demand for luxury goods to plummet. Since November, luxury businesses have grappled under the economic impact of the Covid-19 pandemic, as well as a fall in domestic and tourist spending globally. According to estimates by Boston Consulting Group, global luxury sales are set to contract 25% to 45% in 2020, with a slow recovery that could take up to three years. Specifically, Tiffany’s global net sales fell 29% in the quarter that ended July 31.

It came as no surprise when, in May, the corporate world heard speculation that LVMH was looking to re-examine its deal with Tiffany due to the pandemic. In September, LVMH announced that it would not be going ahead with the acquisition.

Cautious not to blame the break up entirely on coronavirus, LVMH references a “succession of events” that had undermined the deal and led to a review of the contemplated investment. This included intervention by the French government, who had sent a letter to LVMH asking it to delay the deal beyond January 6 in the wake of the threat of U.S. tariffs on French goods. The luxury conglomerate stating that it had “no other choice” but to honour the “governmental order”. LVMH also said Tiffany had requested to extend the completion date from November 23 to December 31, which was outside of the date in the merger agreement.

Secrets are slowly coming out of the woodworks

The French government’s involvement in this deal is unprecedented and has elevated what would have been a standard corporate dispute into a matter of much larger geopolitical interest. The French government’s request seemed a little too convenient for LVMH, who’d spent months reconsidering the deal. Speculation suggests that Arnault – nicknamed the ‘wolf in cashmere’ for his aggressive business tactics – may have asked the government for assistance in calling time on the acquisition. Unsurprisingly, LVMH maintains its innocence.

The relationship turns sour

Tiffany filed a reactionary lawsuit against LVMH, launching a double-pronged attack. The lawsuit outlined the crumbling of the deal over the past six months. The jeweller’s chairman, Roger Farah, said the letter from the French government did not provide a legal basis for breaking the binding contract, and that LVMH’s failure to include Tiffany in its discussions with the government breached LVMH’s consulting obligations under the merger agreement. In a securities filing, Tiffany said that although LVMH had informed the jeweller of the letter, it had not yet seen the letter itself. To add fuel to the fire, no other French company had received such a request from the French government which Farah says, is evidence of LVMH’s “unclean hands”.  

In the same press release, Farah accused Arnault of dragging his feet. According to Tiffany, LVMH failed to secure the required regulatory approvals from the EU, Taiwan, Japan and Mexico in the days leading up to the deal’s closing date, despite Tiffany electing to extend the closing date. Further, the Covid-19 pandemic has not prevented any other parties from making their required regulatory approvals on a timely schedule. Among the ten largest transactions announced since the beginning of the fourth quarter of 2019, this is the only transaction that has not formally filed for approval. Combined, Tiffany believes that LVMH got cold feet and tried to use “any available means in an attempt to avoid closing the transaction on the agreed terms”.

In a predictable move, LVMH countered back arguing that the coronavirus pandemic had seriously damaged the U.S. jeweller’s business and carried “devastating and lasting” effects. The pandemic, it added, amounted to a Material Adverse Effect that gave LVMH grounds to walk away from the deal unscathed and without repercussion.

Kiss and make up

And yet, it seems that the two luxury powerhouses will walk the isle after all. Tiffany recently signalled that it was willing to consider a revised price as long as it remained above $130 a share and the French company agreed to close the transaction without further changes. The agreement, which knocks $400 million off the original $16.2 billion price tag, ends weeks of corporate fighting and puts the French conglomerate LVMH in a position to be a dominant force in jewellery.

How the deal will reshape luxury

The jewellery brand gives LVMH the chance to work with a historic luxury house boasting a rich heritage and a strong public image perfected over almost two centuries. The deal is designed to help LVMH compete with rival Swiss jewellery seller Richemont by cementing its position in the jewellery and watch division – LVMH’s “weakest area”, according to Luca Solca, a senior research analyst of luxury goods at Bernstein. It would also help it to strengthen its presence in the U.S., a task for which it will be able to rely on the New York-based jewellers expertise that only a handful of rivals can match.

The deal, which must be approved by Tiffany shareholders, is expected to close in early 2021; “the LVMH and Tiffany saga seems to have finally come to an end” said Farah.

By Amani-Cane Elouazani

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