Niki Saberi-Oskoui analyses the acquisition of Tiffany & Co and the impact of Covid-19.
In November 2019 LVMH, run by France’s richest man Bernard Arnault, agreed to buy US jeweller Tiffany & Co. LVMH is the luxury conglomerate behind major brands such as Fendi, Christian Dior and Givenchy, as well as Veuve Clicquot champagne. It is one of the top performers in the upscale retail sector. On the other hand, Tiffany is based in New York and known worldwide for its diamond engagement rings. Currently, Tiffany & Co operates more than 300 retail stores globally.
The deal was originally negotiated as a $16.2 billion acquisition. LVMH offered a 37% premium to the New York-listed company’s undisturbed share price. The deal would expand LVMH’s presence in the US and increase offerings in the fast-growing jewellery and luxury market. The deal included Skadden Arps and White & Case who instructed for LVMH and Sullivan & Cromwell were known to be acting for Tiffany & Co.
The Covid-19 pandemic and historic riots surrounding Black Lives Matter have knocked the sector significantly. Protests have led to looting and vandalism in upscale retail areas; therefore, the luxury market has suffered from a loss of boutique shoppers. These events have punished the stock prices of various luxury companies. Tiffany & Co has been trading at 10-20% below LVMH’s offer price since March. Net sales have dropped 45% from a year ago in the 3 months to the end of April. The brand has recorded a 17% drop in comparable sales in the first quarter as a result of the pandemic. However, Alessandro Bogliolo, Tiffany’s Chief Executive has reassured that the company’s sales have risen sharply in China in April and May which is ‘indicative that a robust recovery is underway’. He further added that in the first quarter, e-commerce sales rose by 23%.
The US government has recently announced its plan to levy import taxes on $3.1 billion worth of European and UK products. Among the most affected is LVMH as their products stand to become more expensive in the world’s largest economy which could lead to lower earnings.
The luxury conglomerate LVMH planned to renegotiate its acquisition and potentially pressure Tiffany to lower the agreed deal price of $135 per share. Alternatively, LVMH could buy Tiffany’s shares on the stock market instead. This means that they could end up acquiring the company for less than the $16 billion that they had offered. However, LVMH have confirmed that it would not go down this route.
A potential alternative is renegotiating a lower price. Nevertheless, negotiating will be tough as a legal contract has been signed by LVMH. In M&A, such contracts include firm ‘no take-back’ clauses. In reality, Tiffany can back out of the contract for a $75 million fee, however, this may lead down the court process. One way to begin the negotiation process would be if Tiffany breached its financial covenants under the deal. However, Tiffany has firmly stated that there is no legal basis to renegotiate the deal as the company is in clear compliance with the financial covenants under the merger agreement.
Alternatively, the Financial Times has reported that a potential workaround may be through Tiffany’s debt pile. If a payment is missed, this would give LVMH leeway for negotiation, however, this opportunity is looking bleak. Tiffany is in reasonable financial health as it is still issuing dividends.
Another alternative may be to rely on the Material Adverse Change (MAC) provisions which are commonly included in agreements, yet rarely relied upon. This provision allows a company to renegotiate or walk away from a deal if the other company or its subsidiaries announce a significant event which may negatively affect its stock price or operations. There is a significant uncertainty regarding whether Covid-19 qualifies as a MAC. Currently, there are no examples in the UK or US of MAC provisions being invoked due to an epidemic or pandemic (such as the 2003 SARS epidemic or 2009 swine flu pandemic).
In current news, the Retail Gazette has reported that the Fair Trade of Commission of South Korea has given the green light to the acquisitions, and further stated that the stock purchase does not restrict competition in the local market. The deal is pending approval from the Australian Foreign Investment Review Board.
The pandemic has forced many companies to negotiate or walk away from major deals. Recently, private equity firm Sycamore Partners called off a $500 million agreement to take full control of Victoria’s Secret from its owner L Brands. In recent months, deal spreads have widened. This is the difference between the price at which a company has agreed to buy an acquirer’s shares and the current price of the shares. This has led to many investors predicting more deals to collapse.
The deal between LVMH and Tiffany has illustrated the precarious nature of the current market. It is evident that many deals will continue down a rocky road as Covid-19 influences stability and prosperity in the market.
By Niki Saberi-Oskoui