Tiffany Stays One Step Ahead of LVMH

The U.S. jeweller had a loss in its first quarter but renegotiated the terms of its debt, making it harder for the French luxury giant to push for a lower takeover price.

By guest author Carol Ryan from Wall Street Journal

Graphic and caption courtesy by Wall Street Journal

Tiffany TIF & Co. is a fraction of the size of LVMH, LVMUY – but the U.S. jeweller is doing a good job of outmaneuvering its powerful buyer.

The New York-listed company said Tuesday that comparable sales for the three months through April fell by 43 % compared with the same period of 2019, excluding currency movements. The business had a loss of USD 65 million during its first quarter, which was affected by the Covid-19 crisis from start to finish as lockdowns spread westward from Asia to its domestic market.

Current trading is more positive in China at least. Sales there were up 90 % in May from a year earlier as Chinese shoppers, who have historically bought luxury goods when on vacation, made more purchases at home.

Tiffany is also staying a step ahead of Bernard Arnault, founder of the world’s largest luxury business by sales, LVMH Moët Hennessy Louis Vuitton. The French billionaire is reviewing the $16.2 billion offer he made for Tiffany late last year. The U.S. company persuaded its lenders to increase the leverage ratio at which it would be in breach of its borrowing terms. It is allowed to do this under the merger agreement, according to finance chief Mark Erceg.

That will make it harder for the French company to cut its current USD 135-a-share offer; a covenant breach could have helped LVMH to force Tiffany back to the negotiating table. The new terms will be in place until next year—long after the deal must close.

Tiffany’s lawyers have left LVMH with little flexibility in the merger agreement. Although there is a USD 575 million break fee if the jeweler itself decides to walk away, the buyer doesn’t have the same option.

There is no specific clause that would allow LVMH to walk away in a pandemic. Nor can it use a deterioration in the relationship between the U.S. and China, or any event that affects the luxury industry as a whole, as reasons to break the contract.

Mr. Arnault is a formidable deal maker and has amassed more than 70 luxury brands over four decades. But if he can’t get Tiffany at a cheaper price, his choices will be bleak. Either LVMH pays up at the pre-pandemic valuation and it takes a long time to generate value from a weakened Tiffany. Or it walks away and potentially faces years of litigation.

Tiffany has more to lose if this deal falls through, and its shares are already trading well below the offer price. Still, the legal fine print gives it the upper hand for now.