LVMH Is readying Its Red Pen for Tiffany’s Books

U.S. jewellery company cannot put a foot wrong before the trial that will decide the fate of luxury’s biggest deal

By guest author Carol Ryan from Wall Street Journal

Graphic and Caption courtesy by Wall Street Journal

LVMH has gone quiet about the letter from the French government that was the original reason it cited for derailing the luxury sector’s biggest-ever deal. As its focus shifts to Tiffany’s business performance, the U.S. jewelry company needs to tread carefully.

On Monday, the Delaware court that is hearing the companies’ dispute said the four-day trial would begin January 5, 2021. Neither side got exactly what it wanted. Tiffany asked for a ruling before the USD 16 billion deal was due to lose in late November, while LVMH Moët Hennessy Louis Vuitton, as the French company is formally known, hoped the trial could be pushed back until late spring.

The January date does give LVMH one extra set of accounts to pour over. Tiffany is due to report its third-quarter results in early December. LVMH plans to show that the company has been so badly managed during the pandemic that it has the right to walk away from the deal. It has criticized Tiffany’s decision to pay a dividend even though the crisis tipped it into making a first-half loss and called its performance over the period “very disappointing.”

Today, that argument looks watery. The deal can’t be called off because of an event or economic downturn that impacts the luxury industry as a whole. And it will be tough to show that Tiffany has fared worse than peers. Like-for-like sales at LVMH’s own watches-and-jewelry division fell 39 % in the six months through June versus the comparable period last year, pushing the unit into the red. Online traffic and social-media data show that Tiffany outperformed LVMH’s own jewelry brand Bulgari during the summer months, according to Bernstein luxury analyst Luca Solca.

The French company’s founder, Bernard Arnault, and his legal team now have an extra six weeks to scour Tiffany’s books. Exposure to malls in the U.S. is likely to be a drag on performance. And LVMH will watch for signs that management is aggressively slashing costs to hit a punchy fourth-quarter profit target. That would allow it to argue that underinvestment will damage the Tiffany brand long term.

So far, the acquisition target has managed to keep pace with LVMH’s maneuvers. The French company was surprised by how quickly it was able to sue—the same day the deal went south. And earlier this summer, Tiffany overhauled terms with its lenders to make sure a covenant breach couldn’t be used against it. Tiffany will have to keep up this work. With USD 16 billion at stake, LVMH will likely throw everything it can at the case.