AUTHOR

NICOLAS NARDELLI

nicolas.nardelli@edhec.com

LVMH CEO, Bernard Arnault, after having hinted to U.S. President Donald Trump that a major acquisition was going to be made, finally baited Tiffany.

Announced on November 25, 2019 for a total amount of $16.6bn, the deal is expected to strengthen LVMH’s presence in the United States and its position in high-end jewellery.

In a market where 80% of the products sold are not associated with a brand, jewellery is still one of the few with very significant development potential. Therefore, is the price paid by LVMH disproportionate or does it represent a golden opportunity?

The luxury industry continues to shine 

Watches and Jewellery are usually referred to as “hard luxury” to differentiate them from items such as leather accessories, bags and designer clothing (“soft luxury”). Globally, some uncertainties such as the trade war between the United States and China, Brexit, the various political upheavals, or the fear and reluctance of investors with regard to a possible global recession do not seem to be reflected in the share price of these luxury companies, which are gradually growing. For example, if we take a closer look at the evolution of the LVMH share price in 2019, we observe an increase of nearly 60%. The same is true for Hermès, Kering, and Christian Dior, which have seen their share price increase by approximately 30% to 40%.

Let us now focus more specifically on the watches and jewellery segment. According to the Statista platform, the latter generated revenue of $58.6bn in 2019, an increase of +2.1% over 2018. Eastern Asia and China represented more than 60% of the total market revenues while the United States and the Eurozone only account for 30%. In comparison to other European sectors, luxury goods groups obtained some of the highest rates of “net positive revenue surprises” against their targets and analysts’ expectations throughout the 2019 earnings season, according to UBS. They all cited strong momentum in China in their results. Nevertheless, the segment is and will be considerably impacted by new consumption habits, the emergence and rise of new classes, as well as technology innovations.

Millennials and Generation Z’s interest in luxury brands is skyrocketing and dominating the market. Brands have understood this and are doing everything possible to modernize their brand image and attractiveness. We can detect this through numerous collaborations with so-called “streetwear” fashion houses such as Louis Vuitton with Supreme, or Christian Dior with Air Jordan. We can also observe this with the boom in e-commerce and digital development pushing these companies to adopt an omnichannel strategy. A strategy that is extremely beneficial to them in terms of visibility, customer experience and increased sales.

The final outlook is that the watches and jewellery segment is expected to experience an average annual growth of 2.05% in order to reach a market size of $64bn by 2023 and accordingly, competition will intensify.

LVMH and Tiffany: the perfect match

After multiple negotiations, LVMH finally managed to get hold of Tiffany. The US firm refused to close the deal for an offer of $120 per share, then for $130 per share, but succumbed to the ultimate offer of $135 per share (i.e. a control premium of 37%). This represents an enterprise value of $16.6bn, including an equity value of $16.2bn and net debt of $400mn. To give an order of magnitude, the total value of the deal represents approximately 17 times Tiffany’s EBITDA. Consequently, the operation will be financed by 3 types of debt: a $8.5bn bridge, a $5.75bn Commercial Paper (CP) back-up line, and a €2.5bn Revolving Credit Facility (RCF). In order to refinance these debts, LVMH will issue bonds on the market. The acquisition is expected to close by mid 2020 after shareholder approval and antitrust clearances. Now that the structure of the deal has been exposed, let us have a closer look on the buyer and the seller.

LVMH, Moët Hennessy Louis Vuitton, is the world’s leading luxury group. The company is present in 5 main business sectors: wines and spirits (e.g. Dom Pérignon), fashion and leather goods (e.g. Louis Vuitton), perfumes and cosmetics (e.g. Guerlain), watches andjewellery (e.g. Bulgari), selective retailing (e.g. Sephora).The French multinational operates over 2’400 stores worldwide with more than 145’000 employees.

Financially speaking, the group had another record year in 2019, reporting a turnover of €53.7bn thanks to the success of its flagship brands Louis Vuitton and Christian Dior, but also to strong demand from China. Sales increased by 10% organically, in line with forecasts by Bloomberg and FactSet. The Asia region (excluding Japan) is the Group’s largest market, accounting for 30% of its total sales. Sales in this zone rose by 14% for the full year, compared with +11% for Europe, +8% in Japan and +6% in the United States. EBITDA margin remains stable at 21,4%. In addition, net profit reaches €7.17 billion, up 13% year-on-year. Net margin thus stands at 13.4% of sales, close to that of the previous year (13.6%, which was the highest level since 2010).

Founded in 1837, Tiffany is, today, the leading luxury brand originated in the United States. Tiffany employs over 14’200 staff, and has 321 retail stores around the globe, including 124 in Americas, 90 in the APAC region, and 47 in Europe. Known for its diamonds and sterling silver jewellery, the company has been suffering in recent years from dropping footfall, a strong US dollar, but also a decrease in spending by tourists. These factors are reflected in its results. Indeed, the global luxury jeweller struggles to grow. It reported a turnover of $4.4bn in 2018, down 1% from the previous year.

The reasons behind LVMH’s largest luxury acquisition

The acquisition will make LVMH a major player in hard luxury in order to compete intensively with Richemont brands such as Cartier. There are many reasons behind this takeover.

Firstly, the acquisition of Tiffany, famous for its “blue box” packaging, gives LVMH the opportunity to get its hands on a historic house, endowed with a rich heritage, and an image that has been consolidated for nearly two centuries. Although the American jeweller has experienced a slowdown in recent years, mainly due to its management, changing CEO twice in the space of 4 years, the brand has been under-exploited and has strong growth potential. This will give LVMH the opportunity to replicate the approach it had undertaken with Bulgari. Since its takeover in 2011, Bulgari has seen its turnover doubled and its profit quintupled without changing its core strategy. It is the reason why, Jean-Jacques Guiony, LVMH’s Chief Financial Officer declared “We have great respect for Tiffany & Co., its management and its strategy and we do not intend to turn everything upside down” and that the best way to do better is to support the company in implementing its strategy with the aim of improving simultaneously “the product, the distribution network and the branding”. He also added “As our experience with Bulgari has taught us, we are going to insist on the development of the collections, because the collection is the heart of this business”.

Secondly, the company headed by Bernard Arnault will benefit from Tiffany’s employees, including 5,000 highly skilled artisans. It will also benefit from its 321 points of sale and gain exposure in the USA (representing 44% of Tiffany’s sales). However, one of Mr. Arnault’s biggest challenges is to develop Tiffany beyond its main markets (USA and Japan) in order to penetrate deeply into the European and Chinese markets which, according to him, present “a lot of untapped potential”.

Furthermore, Tiffany has a vertical process from design to production. Since 1982, it has had total control over its supply and sources all its diamonds and raw materials, particularly the rough diamonds that it then has cut. The majority is obtained from known mines and sources which operate in environmentally and socially responsible ways. This is an undeniable advantage for LVMH, which will be able to make a major step forward in terms of sustainable development and achieve possible cost and revenue synergies, as Mr. Guiony tells us: “We want to capitalize on the company’s fully vertical production structure and create certain synergies at group level. For example, we could benefit from diamond sourcing”. 

Finally, in terms of sales and operating profit, the watches and jewellery category is LVMH’s smallest segment, representing 9% and 7% respectively. Nevertheless, since 2010, the luxury leader has dynamically and particularly developed this segment. Thanks to its multiple acquisitions, the complementary positioning of its brands (e.g. TAG Heuer, Hublot, Chaumet, Fred, Bvlgari), and the regularly updated collections of these brands, the Group’s sales in this segment rose from $985mn in 2010 to $4.4bn in 2019. Adding the iconic American jewellery Maison Tiffany to its portfolio should enable LVMH to achieve a hard luxury revenue of $9.6bn and to match its direct competitor Richemont, which has $10bn of revenue in this division. As a result, according to Bloomberg Intelligence, LVMH’s market share in jewellery should be catapulted to 18.4%.

Conclusion

By acquiring one of the last major independent companies without a reference shareholder, LVMH has made a big splash. The price paid by LVMH does not appear to be disproportionate in view of the group’s experience in managing mergers and acquisitions and the various synergies expected. Moreover, the watch and jewellery market is promising, and this long-term investment seems to be a masterstroke. As Mr. Arnault revealed to the Financial Times newspaper, the objective is clear: “desirability for the brand should be higher in 10 years’ time than it is right now. Profit and growth will be a consequence of that.”. It is something we should keep an eye on.

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Sources:

Nicolas Garin and Cathy Alegria, “LVMH”, Xerfi, June 2019

Petra Frent, “Leading Players of the Global Luxury Goods Industry”, Xerfi, June 2019

“Luxury Watches & Jewelry”, Statista Consumer Market Outlook, October 2019 

Albertina Torsoli, “LVMH’s $16 Billion Tiffany Takeover ‘A Smart Move’: Street Wrap”, Bloomberg, 25/11/2019

Harriet Agnew and Michael Pooler, “Art of a deal: how LVMH paid up for Tiffany”, Financial Times, 25/11/2019

George Arnett, “What acquiring Tiffany for $16.2 billion does for LVMH”, Vogue Business, 25/11/2019

“LVMH reaches an agreement to acquire Tiffany & Co.”, LVMH, 25/11/2019

LVMH financial documents, 31/12/2019

LVMH Annual Report 2018 

Tiffany Annual Report 2018

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