LVMH Takes a New Look at Proposed $16.2B Tiffany Merger

flcikr user: priceminister
AUTHOR|Daphne Howland@daphnehowland
Source: www.retaildive.com, June 2020

The luxury house may try to cut its purchase price in light of the pandemic and now civil unrest in the U.S., but analysts doubt the deal will collapse.

The planned $16.2 billion acquisition of American jeweler Tiffany by Parisian conglomerate LVMH Moët Hennessy Louis Vuitton appears to be on the rocks.

The companies had touted their deal when they announced it in November as beneficial to both, strengthening LVMH’s luxury jewelry portfolio and providing Tiffany with much-needed resources to achieve its aims for long-term growth. Tiffany shareholders in February signed off on the plan, which was expected to close right about now.

But following reports in Women’s Wear Daily and Reuters describing new hesitation in Paris to go forward with the agreement in light of the COVID-19 pandemic and widespread civil unrest in the United States, LVMH in a press release Thursday confirmed that its board had met Tuesday to discuss “the development of the pandemic and its potential impact on the results and perspectives of Tiffany & Co with respect to the agreement that links the two groups.” The luxury house also made clear “on this occasion, that it is not considering buying Tiffany shares on the market,” suggesting that it may be seeking to lower the agreed-upon $135 per share purchase price by reopening negotiations.​

Tiffany didn’t immediately respond to Retail Dive’s requests for comment.

Reuters on Wednesday quoted unnamed sources saying that LVMH is contemplating the argument that Tiffany is in breach of their agreement in order to do just that. WWD the previous day reported that the disease outbreak and massive U.S. protests led LVMH board members to question Tiffany’s ability to cover its debt covenants after the deal closed. Sycamore Partners earlier this year floated a similar argument in court in an effort to call off its agreement to buy lingerie giant Victoria’s Secret, although the private equity firm and brand parent L Brands called things off before it was legally tested.

Sycamore had argued that L Brands’ store closures, in some cases mandated by local governments to foster social distancing amid the disease outbreak, was a violation of its agreement to conduct business as usual. For its part, Tiffany had begun reopening some stores after pandemic-related restrictions eased. But the retailer June 1 shut all of its U.S. stores due to widespread protests against police brutality, according to a note from Credit Suisse analysts Wednesday.

There are also key differences between the LVMH-Tiffany agreement and the Sycamore-L Brands one. One is that Sycamore’s plans for a struggling Victoria’s Secret were unclear, while Tiffany aims to continue on a path that has already proved somewhat fruitful. In its most recent quarter, net sales rose 3% year over year to $1.4 billion as comparable sales also increased 3%; net earnings in the quarter dipped 2% to $201 million.

Plus, Tiffany’s “ordinary course” covenant doesn’t include a qualification that business must be conducted “consistent with past practice” between the time of the agreement and the closure of the deal, according to Cowen & Co. analysts. However, one clause that stipulates there be no material impairment to Tiffany’s ability to comply with the agreement doesn’t contain a carve-out for a reason like a pandemic, Cowen warned.

The debt cited in WWD’s report as a possible impediment to the deal closing does carry some weight, analysts said. But there are also mitigating factors, including Tiffany’s ability to tap its liquidity cushion, renegotiate debt terms and “substantially lower” its rent this year, according to Credit Suisse analysts led by Michael Binetti.