The tone might have sharpened as Tiffany & Co. vs. LVMH Moët Hennessy Louis Vuitton grinds toward a trial in early January, but so far none of the indignation, finger pointing or fine print in the merger agreement seems to have changed the investment calculus much.
Since LVMH first said earlier this month that it wanted to drop its $16.2 billion acquisition of the American jeweler, pointing initially to an unusual request from a French government official, Tiffany’s stock has traded between $114 and $116 a share — below the $135 the deal promised when signed in November.
The stock closed at $116.44, down 0.2 percent, on Tuesday. That nearly 14 percent discount represents the market’s best guess that takes into account the chances that the deal gets done at $135, is renegotiated for a lower price or just gets dropped all together.
And so far, the vitriol from both sides has done little to influence the betting on Wall Street.
Oliver Chen, a Cowen stock analyst, said there’s a 15 percent to 25 percent chance the deal is closed at its original price, a 50 percent to 60 percent chance the price tag is cut to $120 and a 20 percent to 30 percent chance the transaction goes away, sending Tiffany’s stock well below $100.
Although LVMH has argued that the company it negotiated to buy last November is essentially gone, given the coronavirus and recent mismanagement, Chen maintained that Tiffany still has the characteristics that drew luxury titan Bernard Arnault’s eye in the first place. He pointed to “the iconic nature of the brand,” its “bridal exposure” and its “vertical integration.”
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“The principles around why LVMH liked the business will persist for the long term,” the analyst said. “We always believed that it’s a unique asset as arguably America’s most important luxury brand.”
If the deal were to be renegotiated, it would require shareholder approval — again — and therefore an extended process, Chen noted.
A key question is if the two sides really want to square off in court, he said.
“There’s a lot of back and forth,” he said of the latest round of dueling statements and suits, “but when you go to Delaware [court], the judge will decide.”
Chen said the approach on both sides has been “unique and aggressive” since the deal went south.
“The luxury industry has historically been one of discretion,” he said, but also acknowledged, “I think it’s been important for both sides to stand their ground in this situation.”
Erwan Rambourg, an analyst at HSBC, agreed that the rationale for the deal was “still very much intact.”
“Clearly, jewelry is part of the equation for growth in the future,” he said, referring to LVMH.
But he noted that Tiffany, with a price negotiated at $16.2 billion, amounts to a “rounding error” in LVMH’s market capitalization of 206 billion euros. And that a discount off of the negotiated price is “a bit of a rounding error squared.”
Rambourg said there’s one ultimate decision maker for the deal at LVMH — Arnault — and that he either wants Tiffany eventually or is now looking toward other opportunities.
“We have investors in London talking about LVMH switching brides, getting out of Tiffany and getting closer to [Compagnie Financière] Richemont, for example,” Rambourg said.
Those types of mega-luxury deals are dreamed about periodically by investors, but only time will tell.
“My understanding is, for the time being, [LVMH and Tiffany are] going to court,” Rambourg said, adding “nothing is impossible.”
In the here and now, Tiffany vs. LVMH is heating up.
On Tuesday, Tiffany shot back at LVMH, calling the counterclaims the French firm filed in a Delaware court on Monday “baseless and misleading.”
LVMH has argued it has the right to leave the deal under the contract and that French authorities have compelled it to hold off on the transaction due to a brewing U.S.-France trade war.
“LVMH’s specious arguments are yet another blatant attempt to evade its contractual obligation to pay the agreed-upon price for Tiffany,” said Roger Farah, chairman of the New York-based jewelry company.
“Tiffany has acted in full compliance with the merger agreement, and we are confident the court will agree at trial and require specific performance by LVMH,” Farah said. “Had LVMH actually believed the allegations made in its complaint, there would have been no need for LVMH to procure the letter from the French Foreign Minister as an excuse for its refusal to close.”
While much of the legal argument turns on familiar points — with lots of attention paid to what the material adverse effect clause in the contract does and does not stipulate — the involvement of the French government is an unusual wrinkle.
When LVMH first said it wanted to drop the deal on Sept. 9, it pointed to a letter from France’s Minister for Europe and Foreign Affairs, which “asked LVMH to defer the transaction.” The company has since expanded its rationale to nix the acquisition, but its counterclaims also flesh out its thinking on the letter, saying that it compels them in terms that have “a (polite) mandatory meaning under French law.”
In its response, Tiffany pointed to additional evidence of “bad faith” when it comes to the involvement of the French government.
Tiffany noted: “LVMH subsequently asserted publicly that the letter was not solicited by LVMH. However, on the floor of the French parliament last week, the minister who signed the letter admitted that he only sent the letter in response to an inquiry from LVMH.”
The jeweler said it has still not received a copy of the letter in its original French and that “LVMH’s seeking this letter was a clear violation of its obligations under the merger agreement, and Tiffany anticipates that more of LVMH’s duplicity will come to light during the trial.”
That trial is set to start Jan. 5 with the hopes that a deal — if warranted after appeal — could go through before the U.S. authorization of the transaction expires Feb. 3.
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