By Niclas Hallberg, Harvey George, Jonathan Fuchs, Chiara Fulvi (London School of Economics), Ilya Korzinkin, Mihir Gupta, Hugo Tay and Siddarth Sharma (UCL) – Date: 14/12/2019
Overview of the Deal
Acquirer: LVMH (EPA: MC)
Target: Tiffany and Co. (NYSE: TIF)
Estimated Value: $16.6bn ($135 per share)
Approved on: 25 Nov. 2019
Acquirer Advisors: Citigroup, J.P. Morgan
Target Advisors: Centerview Partners, Goldman Sachs
Anticipated close: Mid 2020
In the largest ever luxury sector acquisition, LVMH will add yet another brand to its existing portfolio of 75, thereby defending its status as the world's biggest luxury conglomerate. In late November LVMH convinced Tiffany’s board to accept an offer of $135 per share ($16.6bn) - a substantial revision of its initial offer of $120 per share ($14.9bn).
The acquisition of the american luxury jeweller is anticipated to increase LVMH’s market share in the branded jewellery sector to 18.4%, eclipsing Richemont’s historically dominant market share of 14.8%. Richemont, the Swiss owner of Cartier, Van Cleef & Arpels and a plethora of other luxury watch brands, will be LVMH’s biggest competitor in the hard-luxury sector.
Tiffany & Co. has been struggling to produce revenues in recent years, and has recently missed earnings by wide margins. Thus, Tiffany’s board and Bernard Arnault, Europe’s richest man and chairman and CEO of LVMH, believe the jeweller would benefit from not having to report its financials publicly - something Tiffany would not have to do once subsumed by LVMH. Furthermore, as recent history has shown, consolidation is the key to success as the capital and economies of scale a conglomerate can provide prove invaluable to individual brands.
Company details (Target - Tiffany)
Tiffany & Co. was founded in 1837 in New York City, and currently has over 300 outlets worldwide. The brand specialises in diamonds and jewellery, and has a product offering that spans a wide price range. Before the acquisition, Tiffany has always been an independent company, and its shareholders include Vanguard, and Qatar Investment Authority. Ever since Audrey Hepburn starred in the movie ‘Breakfast at Tiffany’s”, Tiffany’s iconic blue ribbon brand has been globally recognised and admired, making it a valuable asset for the company. Tiffany has struggled to keep up with the changes in recent fashion, and the spending habits of Chinese consumers, who make up 30% of the demand for luxury goods worldwide. As a result, Tiffany has been hit by lower spending by consumers in Asia as well as by tourists in the US. Because of this, Tiffany’s revenue has greatly slowed recently, however its brand prestige still remains high, making it one of the most valuable assets to the company.
- Founded in 1837, headquartered in New York
- CEO: Alessandro Bogliolo
- Number of employees: 14,200
- Market Cap: $14.72bn - EV: $16.96bn
- LTM Revenue: $ 4.38bn - LTM EBITDA: $ 971.4m
- LTM EV/Revenue: 4.03x - LTM EV/EBITDA: 18.18x
Company details (Acquirer - LVMH)
LVMH is a Paris-based luxury conglomerate, with holdings that span the whole luxury industry, including wine, fashion, leather, perfume, cosmetics, and watches. It is the biggest public company in France, and has shown strong growth in recent years, with its share value appreciating by an extraordinary 60% over the past year alone. LVMH’s business model is inherently built on acquisitions, which so far have proven incredibly successful, and have made the conglomerate industry leader in all sectors of luxury.
- Founded in 1987, headquartered in Paris, France
- Chairman and CEO: Bernard Arnault
- Number of employees: 156,000
- Market Cap: $ 222.06bn - EV: $ 221.53bn
- LTM Revenue: $ 50.16bn - LTM EBITDA: $12.2bn
- LTM EV/Revenue: 4.45x - LTM EV/EBITDA: 18.30x
Industry overview
The takeover is the biggest ever in the luxury goods industry, which as of recently has been growing strongly and, strangely enough, seems to be unaffected by fears of recession. This may be because the industry is basically immune to competition from China and the US, and, being mostly dominated by Continental European players, is relatively unaffected by trade tensions and Brexit. China is thus an opportunity, not a threat, for the industry, as it accounts for 30% of luxury demand, forecasted to rise to 46% by 2025. Jewellery is one of the strongest performing areas of luxury industry, and is predicted to grow by 7% this year according to Bain consultants. This is very promising, despite luxury brands being notoriously hard to value, buying a struggling brand in a growing industry surely presents many opportunities. Flavio Cereda from Jeffries highlighted the “scarcity value”of Tiffany & Co., as it is one of the few big companies in hard luxury, one of the least crowded categories in the luxury sector.
Deal structure
In late October, Antonio Belloni, group managing director at LVMH, presented Alessandro Bogoglio, chief executive for Tiffany, with a letter offering to buy the firm for $120 a share, for a total valuation of $14.5bn. Five weeks of intense negotiation followed LVMH’s initial takeover approach. The initial bid was rejected by the target arguing that it significantly undervalued the company. In the meantime, Tiffany’s advisers received a number of enquiries from other luxury goods groups, but no obvious rival emerged. Earlier in november LVMH informally increased its offer to closer to $130 a share, leading to the official offer of $135 a share, not far off Tiffany’s all time high. This puts the enterprise value at 17 times EBITDA, which is more than 50 % higher than tiffany’s 10-year average.
The higher offer was approved by the boards of both companies on Monday 25th November, and the deal is expected to go through in mid-2020. The acquisition will be in all cash and LVMH will finance it by issuing bonds. It is said that Mr Arnault had plans of acquiring tiffany ever since buying Bulgari in 2011 for $5.2 billion.
After the announcement, LV’s shares were up by 2%, whereas tiffany & Co were up by 6%, which indicates the market perceives the deal positively for the long term value of both companies. One Jeffries analyst is quoted to deem the deal fairly price, and a very good deal for LVMH. A manager at Fidelity Global Consumer Industries, shareholder in both LVMH and Tiffany & Co., said they are pleased with the bid.
Projections and Assumptions
Short-term Consequences
Tiffany's revenue has declined over the years as it struggled to cope with a declining tourist spending power and a strong US dollar. As a result, The upmarket American jeweller has fallen into an 'easy growth trap' whereby they have provided entry-level luxury goods, which is predominantly silver, which erodes their luxury brand equity. On the other hand, the current portfolio for LVMH is predominantly Europe- based, which includes Bulgari, Louis Vuitton and Dior, all of which are experiencing positive growth propelled by the growing demand of luxury tourism as a result the weaker Euro. . Therefore, it is reasonable to predict that in the short run there will be friction in integrating Tiffany into the LVMH group, as Tiffany would ideally want to leverage the group's knowledge of creating and maintaining brand equity in the American market instead of focusing on short term sales.
"This is one of the significant opportunities for LVMH — to inject Tiffany with creative talent and to surprise customers with unexpected creations."
- Daniel Langer, Equity Brands Insights
However, despite the large breadth different markets targeted, one of the main benefits that can be realised in the short to medium term is brand consolidation. LVMH has a track record of adding luxury jewellers to its portfolio- since its acquisition of Bulgari in 2011, sales have doubled, and profits have increased fivefold. The addition of Tiffany is a strategic move by LVMH to duplicate its success for the American jeweller in improving its short-term profitability through ramping up of product range and expansion of marketing efforts.
Long-term Consequences
In the long run, the addition of Tiffany to its portfolio would expand LVMH's presence in the luxury jewellery market both in terms of market share and geographical reach. The acquisition reflects a move by LVMH to target the Chinese market, in which Tiffany is hugely popular, which account for 30% of global luxury expenditure, and is forecasted to grow to 46% by 2025, according to Morgan Stanley. As one of the most significant acquisitions by LVMH, the Tiffany takeover highlights LVMH's long-term interest in the luxury and jewellery market.
"Tiffany is an American icon, for a long time it was on our list of potential names that could fit well in our portfolio of luxury brands […] It's the only real American luxury house with a very long history."
- Bernard Arnault, CEO of LVMH
Another long-term consequence may be an increase in shareholder value for LVMH investors. The purchase price translates to an equity value of around $16.2bn (£12.6bn), which represents a premium of about 37 per cent over the $98.55 (£73.96) at which Tiffany's shares closed before the acquisition became public. To conclude, it may be worth taking into account the preservation of distinctive identities and sustenance of the 'savoir-faire' on behalf of both companies. There may arise a conflict of interest in terms of the collective value structure the companies might want to go for post the acquisition process; however, this is an aspect that only time can tell.
Risks and Uncertainties
One large risk facing LVMH is a global recession, which has seemed inevitable in the current economic and political climate, particularly in the medium to long term. It is logical to suggest that in the event of a recession, the luxury goods market would take a severe hit, as luxury goods have a very high income elasticity of demand. However, the evidence seems to contradict this assumption. The Bain luxury good report in 2011 states that the luxury good market had grown by over 13% over 2009, despite the recession. This is arguably due to the fact that luxury goods are Veblen Goods (a good where demand increases when price increases). As a result of this combined with the fact the rich are often not hit as hard in a recession, the consumption level of luxury goods will not drastically reduce. However, each recession has different impacts so this evidence may not be indicative of the next recession. This leaves LVMH exposed to an unknown risk which they can not truly mitigate.
Another potential risk is political turmoil in key markets. Asia poses a significant concern to LVMH, especially considering the importance of the Asian market. The Hong Kong protests is an example of a flashpoint which significantly reduced demand in the territory for luxury goods. This has had only a marginal impact on the industry. However, similar events in bigger markets such as China would present far more serious risks. There is a real risk of political turmoil in China whether that be trade wars with the US, the South East China Sea island disputes or the Uighur Muslim genocide. One possible outcome could be stricter visa regulations which would lead to a negative effect on the brand. For instance, half of the sales of LVMH in France are from tourists from emerging market countries such as China, so moves such as stricter visa regulations would reduce sales. Since there is a lot of risk of political turmoil, particularly in China, this move may have come too soon in LVMH’s time horizon.
© 2019 The MergerSight Group