No Breakfast at Tiffany’s: Tiffany & Co push back against initial takeover offer

November 22, 2019

3 min read

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What's going on here?

Tiffany & Co reject surprise $14.9billion takeover bid by the world’s largest luxury goods group, LVMH.

What does this mean?

LVMH, which owns many luxury goods and alcohol companies, is relatively light on “hard luxury” (which comprises watches and jewellery) but is said to be seeking to strengthen its position in this market. This is evidenced by its surprise $14.5billion all cash offer for the jewellery company Tiffany &  Co. The offer, which is equivalent to $120 per share, was reportedly reviewed by Tiffany & Co, but ultimately determined to undervalue the company. It was stated that a price of $140 per share was the price needed to reach a deal. It is reported that LVMH is considering a new offer.

What's the big picture effect?

The proposed acquisition has serious implications for competition in the hard luxury market. LVMH has great incentive to increase their offer. Hard luxury is the only subsector in which they are not a market leader, and they want a piece of the pie that is the jewellery industry (the industry is one of the strongest performing areas of the luxury industry, and is worth $20billion globally).

A Tiffanys takeover, which would follow its acquisition of Bvlgari, would allow LVMH’s hard luxury presence to rival that of current leaders Richemont (owner of Cartier and Van Cleef) and Kering. The acquisition would give LVMH better access to US markets, and midrange consumers who are unable to afford the more expensive Bvlgari. The move would also cater to the new generation of wealthy chinese consumers, who account for a third of all spending, and are described as the driving force in the sector.

As news of the offer surfaced Tiffany’s share prices shot up by 30% as investors considered it likely a rival would enter into a bidding war. However, opponents are likely few and far between, given that, with a price of $140/share, the winner would need to boost revenue growth by 9% each year for five years, and expand the operating margin to 24%. Those with the potential to do so include Richemont and Kering. Currently, Richemont may not be up to the task considering it is still digesting its biggest ever take over, the acquisition of Net-a-Porter last year. For Kering a takeover would strengthen its current move into the jewellery sector, but too high a price would push the companies debt to several times its annual earnings. The takeover may be worth a high price however, as an analyst at Jeffries considers Tiffany the biggest prey in the market as the only US global luxury brand, and it may be hard for Tiffany to fight a reasonable deal due to reportedly stagnant sales.

For LVMH, a deal would potentially be amongst the largest by a European company this year. It would be the biggest for the founder of LVMH, Bernard Arnault, and would almost double LVMH’s jewellery business. It would allow LVMH to compete against leaders in the hard luxury sector, Richemont and Kering, and would increase its hold on the luxury goods market.

Whether or not the takeover happens, this is a useful case study of acquisitions and the effect such a move would have on the industry it affects.

Report written by Julie Lawford

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