By Evan Clark and Miles Socha
with contributions from Sindhu Sundar
 on September 10, 2020
LVMH's is trying to walk away from its blockbuster deal for Tiffany.

Bernard Arnault’s long pursuit of Tiffany & Co. has had it all: the yearning from afar, the whirlwind engagement, the $16.2 billion deal and now the nasty breakup — tinged with a lawsuit and some geopolitical intrigue for good measure.

The biggest deal of the billionaire’s long and storied career — which built LVMH Moët Hennessy Louis Vuitton into a 53.7 billion euro luxury goliath — could also be the strangest. 

And whether it goes through at all could ultimately depend now on a judge in Delaware’s Court of Chancery, politicians navigating trade tensions between the U.S. and France or a bit of last-minute negotiating. 

But however it plays out, the early phase of the dispute already has been filled with vitriol — with Tiffany’s chairman saying LMVH has “unclean hands,” and LVMH’s finance director sneering — as only the French can — at Tiffany paying a dividend when it was losing money.

And all of that isn’t even in the lawsuit.

Chalk it all up to a world changed, by the coronavirus and, perhaps, the Trump-era trade wars that have seen companies conscripted into the back-and-forth between nations. 

While LVMH was the pursuer and approached Tiffany last year — negotiating the deal with its chairman, Roger Farah — the luxury group has soured on the luxury jeweler since COVID-19 hit the world — and the global economy — this year.

WWD broke the news on June 1 that the blockbuster deal was looking a lot less certain, citing details of an LVMH board meeting specifically to discuss the matter amid a deteriorating situation in the U.S. market, Tiffany’s largest. Board members of the luxury giant expressed concern at the time about the impact of not only the coronavirus pandemic, which has claimed more than 190,000 lives in America, but also the growing social unrest over racial injustice. 

But it was ultimately a French digital services tax that impacts companies such as Amazon and Google that gave Arnault what could be an out.

In July, the administration of President Trump, which has bristled at the tax, said it would retaliate by imposing 25 percent duties on $1.3 billion worth of French fashion goods starting Jan. 6.

LVMH on Wednesday said France’s Minister for Europe and Foreign Affairs asked LVMH to defer the transaction beyond Jan. 6, beyond the deal’s deadline, set at Nov. 24.

“Because the implementation of these tariffs may affect France’s external relations, for which my department is responsible, proposed investments by French companies in sectors that could be subject to such sanctions must be reevaluated in light of this new context,” read the French minister’s letter, according to a translation given to Tiffany by LVMH. “My attention was drawn to the most important current investment, which is your group’s pending acquisition of Tiffany. In order to support the steps taken vis-à-vis the American government, you should defer the closing of the pending Tiffany transaction until Jan. 6.”

During a conference call, LVMH’s group chief financial officer, Jean-Jacques Guiony, was unequivocal that it had no choice but to back away from the deal.

“We are prohibited from closing the transaction. It’s a legal restraint, which is a term that is defined by the merger agreement in article 8.1.C,” he told journalists. “The legal restraint is binding upon us. And we have no choice but to apply it so we cannot close the deal by the 24th of November. It’s as simple as that.”

That said, he did not mince words when asked why it didn’t seek to renegotiate the deadline date.

“To be frank, we were not entirely happy with the way the company has been managed and performed over the last few months,” he said, expressing incredulity that the jeweler is loss-making yet still pays dividends.

He noted that LVMH was, by contrast, profitable in the first half of the year, despite facing the same headwinds brought by the pandemic.

(Alessandro Bogliolo, Tiffany’s chief executive officer, maintained in the company’s statement that: “The fundamental strength of Tiffany’s business is clear. The company has already returned to profitability after just one quarter of losses, and we expect our earnings in the fourth quarter of 2020 will actually exceed the same period in 2019.” Separately, one source argued that the company was compelled to continue paying dividends under the deal).

On the call, Guiony bristled at the suggestion — and subsequent widespread press reports — that it was LVMH that lobbied the French government to help it find a loophole to escape the transaction.

“You must be joking. Are you seriously suggesting that we procured the letter? I don’t even want to answer that question,” he said bluntly. “It was fully unsolicited.”

In fact, he said LVMH sought the advice of many legal experts after receiving the letter, visited the ministry, and concluded it had no choice but to “apply the terms of the letter.”

During the call, Guiony was pressed to explain if LVMH had, as Tiffany contends, dragged its feet in trying to get merger clearance in several jurisdictions, including the European Union.

“Probably Tiffany must have heard — but I’m not sure — about COVID-19. I mean, this has been slowing down all the processes with any administration and any business in the world,” he said dryly. “Do I have to remind them that they were deeply affected in particular in the financial results by the COVID-19?”

He went on to explain that while EU authorities must respond to filings within 25 days, the actual filing can only take place after discussions with both parties and that it is a time-consuming process. 

“I mean, you have to apply their rules and logic and not yours. So that’s the way it works,” he said, disputing Tiffany’s charge that LVMH has not been diligent, and calling that “a pure misconception of the way things work and obviously it knows that extremely well.”

Guiony also refuted suggestions LVMH was seeking to negotiate a better price.

“There is no article [in the contract] whatsoever that would allow us to renegotiate the price, there is no such thing and it never crossed our mind,” he said. “I don’t know where they got that from. I mean, we never came to them with any idea that we would renegotiate the price — never.”

Tiffany investors were already skittish and grew more so, sending shares of the jeweler down 6.4 percent to $113.96 Wednesday, well below the $135 deal price. Shares of LVMH largely held their ground, slipping just 0.09 percent for the day to 404.05 euros. 

Giuseppe Bivona, partner and chief investment officer of Bluebell Capital Partners, recently sold its stake in Tiffany as “red flags” emerged last month that LVMH didn’t file to get the EU to approve the deal. (Bluebell’s chairman is Francesco Trapani, former Bulgari ceo both before and after it was acquired by LVMH and former Tiffany board member).

But Bivona wasn’t expecting the acquisition to get pulled into an international trade dispute.

“This move caught everybody by surprise,” Bivona said. “The contract that Tiffany and LVMH signed is pretty much bulletproof, we would say. There were clearly red flags that LVMH was trying to get off the hook but I would say we’re very surprised how they managed to do it.

“It’s pretty much in the hands of the politicians,” he said. “I don’t know what the U.S. response will be. It’s all very bizarre.”

As for Tiffany’s response to LVMH’s move — it immediately went to court in Delaware. But Guiony questioned whether the judge could “consider that a valid French letter from a minister could be something that we as a French company should ignore.”

With the suit, the jeweler said it was trying to compel LVMH to “abide by its contractual obligation under the merger agreement.” 

The deal has taken longer than initially expected and concerns have been growing in some quarters that LVMH was slow-walking the process of obtaining regulatory approval. 

Tiffany noted: “Under the terms of the merger agreement, LVMH assumed all antitrust-clearance risk and all financial risk related to adverse industry trends or economic conditions. In addition, LVMH is required to do everything necessary to secure all required regulatory clearances as promptly as practicable.”

LVMH has not filed official requests for antitrust approval in the EU or Taiwan, the jeweler said.

On Tiffany’s behalf, Farah said: “We regret having to take this action, but LVMH has left us no choice but to commence litigation to protect our company and our shareholders. Tiffany is confident it has complied with all of its obligations under the merger agreement and is committed to completing the transaction on the terms agreed to last year. Tiffany expects the same of LVMH.”

Tiffany noted that the COVID-19 pandemic has not prevented other dealmakers from making antitrust filings and that, of the 10 biggest transactions announced since the beginning of the fourth quarter, this is the only deal that hasn’t been formally filed for antitrust approval in the European Union.

Farah also addressed the letter from French authorities, which Tiffany first learned of on Tuesday. 

“We believe that LVMH will seek to use any available means in an attempt to avoid closing the transaction on the agreed terms,” Farah said. “But the simple facts are that there is no basis under French law for the foreign affairs minister to order a company to breach a valid and binding agreement, and LVMH’s unilateral discussions with the French government without notifying or consulting with Tiffany and its counsel were a further breach of LVMH’s obligations under the merger agreement. 

“Moreover, this supposed official French effort to retaliate against the U.S. for proposed new tariffs has never been announced or discussed publicly; how could it possibly then be an effort to pressure the U.S. into revoking the tariffs?” Farah said. “Furthermore, as we are not aware of any other French company receiving such a request, it is all the more clear that LVMH has unclean hands.”

Tiffany’s 114-page complaint alleges that although LVMH had once indicated its hopes of closing the deal before the middle of 2020, as they had contemplated, the luxury giant’s approach began to change after the COVID-19 pandemic spread in the U.S. 

LVMH said at first, in February, it had raised $10 billion to help finance the purchase. Then it gestured at potentially purchasing Tiffany stock in the open market at a lower price, Tiffany claimed, but then disclosed in March that it would not take that approach. 

The complaint alleges that LVMH’s apparent wavering continued in the following months, with the luxury giant first stating in April that it would just follow the merger agreement, and then in June, icing discussions with Tiffany’s ceo

LVMH has also allegedly slow-walked or stalled its process of obtaining the necessary regulatory approvals in a number of jurisdictions including Japan, Mexico and Taiwan, which Tiffany claimed was a tactic to renegotiate the deal or “run out the clock” before having to fulfill the contract in time. The deal already received antitrust approval in the U.S. in February, Tiffany noted in the complaint.    

LVMH has pointed to the economic effects of the pandemic and the ongoing nationwide protests in the U.S. against police brutality as factors that may warrant some modification of their deal terms, but Tiffany insists their contract is iron-clad. 

“At the direction of billionaire Bernard Arnault, one of the richest persons in the world, LVMH is trying to take advantage of the pandemic and recent social-justice protests in the United States to strong-arm Tiffany into agreeing to a reduced merger price,” Tiffany said in the complaint.

“Before LVMH’s approach, Tiffany was not seen by the market as ‘for sale,’” the company said. 

“Tiffany agreed to enter into the merger agreement with LVMH based on LVMH’s representations and assurances about the certainty of the deal,” the suit said. “A failure of the merger has the potential to affect Tiffany’s stock price, and undervalue significantly the Tiffany brand going forward for investment or potential transactions with other companies.” 

Analysts didn’t rule out the potential for a Tiffany deal to still go through.

Luca Solca at Bernstein noted: “This turn of events is not totally unexpected. COVID-19 has caused second thoughts on a number of proposed deals and the prices they were agreed at. It seems that this is no exception.…Tiffany remains attractive to LVMH and others. We believe this should likely support its price above $100, even if the LVMH deal fell through completely.”

Sola also noted that, “Other suitors may emerge, [such as] Kering and Richemont. While it is unclear if and at what level these companies could be interested, the notion that Tiffany is open to M&A should be a support….[And] LVMH and Tiffany may find a new agreement next year once the international trade dispute is solved (and the U.S. presidential elections are decided).”

Oliver Chen, a Cowen analyst, pinpointed the key questions going forward as: 

• Is the letter from France’s Foreign Affairs Minister binding?

• Does Tiffany’s management want to go through litigation, or would Tiffany accept a price cut?

• And how interested is LVMH in completing the deal? 

“We do believe that recent developments increase LVMH’s leverage in the ongoing acquisition process — key catalysts include the Delaware proceedings, updates from France’s Foreign Affairs Minister, and potential press releases,” Chen said, estimating that there is now only a 15 to 20 percent chance a deal would get done at the $135 price now.

When the deal was cut, combining the financial firepower of the world’s largest luxury group with the iconic American house — known globally for its robin’s egg-colored packaging and classic engagement ring settings — was seen as creating a more robust competitor to the leading jewelry label Cartier, which belongs to Compagnie Financière Richemont.

Now, the competitive landscape is shifting again — and strangely, in keeping with the times.

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