A lot has been said about the $16 billion acquisition of Tiffany & Co. by LVMH, but what is the benefit of this deal?
Nov. 26, 2019
LVMH (EPA: MC), a globally unrivaled group of powerfully evocative brands, is the world’s largest luxury group by revenues headed by Europe’s richest man, Arnault Bernard. LVMH did $51.5 billion in sales last year, three times that of its competitor Kering (EPA: KER). It has a diverse range of brands in wines & spirits, fashion & leather, perfumes & cosmetics, watches & jewelry, and a few other small segments. It has exponentially grown over the years, primarily through its continuous acquisitions of brands like Dior, Hotels Cheval Blanc, and Bulgari.
On Monday, 25th November 2019, LVMH’s acquisition of the biggest jewelry retailer Tiffany & Co (NYSE: TIF) was confirmed. Mr. Bernard sent Tiffany & Co. a letter last month proposing an all-cash takeover bid of $120 a share, valuing Tiffany at $14.9 billion. The Tiffany board rejected this offer as they believed it undervalued the company, but shares in Tiffany jumped by almost 30%, which led to LVMH proposing a new deal at $135 a share, valuing Tiffany close to $16.2 billion.
Which brings us to the question, why does LVMH wants to put a ring in Tiffany’s finger?
The answer lies within the strategic aspirations of LVMH. Most of its revenue (~90%) is earned from fashion and leather goods, selective retail, and high-end perfumes and cosmetics. However, it has been desperate to expand into other luxury segments. In 1999, LVMH bought nearly 100% of shares in Tag Heuer, a Swiss luxury watch and accessories manufacturer. Later in 2011, LVMH bagged Bulgari, paying a 60% premium to its average price.
The jewelry segment is one of the fastest-growing segments (8.1% CAGR) in luxury and there are very few tempting acquisition targets. Since 2000, LVMH has increased its Watches and Jewelry segment revenue from a mere 2% to 9% in 2018, which is still lower than its immediate competitors Richemont (SWX: CFR) and Kering.
Tiffany is a strategic bid by LVMH, primarily because it has an enormous market share in the USA & Asia Pacific. Only 9% of the total watch and jewelry segment for LVMH is from the USA, which is exactly LVMH wants to expand considering it is a huge market and Tiffany is its only quick ticket to tap that. Bulgari, the only current investment of LVMH in jewelry, is a very high-end brand and adding an affordable luxury segment brand like Tiffany will only help LVMH expand its footprint. Tiffany is especially known for its wedding & bridal segment, which is quite big in the U.S. and gaining popularity in Asia. It also has a great diamond supply, sourcing and polishing facilities which are extremely covetable for LVMH.
LVMH wants to compete hard against Cartier (by Richemont) and this acquisition will bring its jewelry revenue from 9% to 17%. Not just the expansion but there is ample room for cost and revenue synergies now that Tiffany is acquired. Tiffany’s current operating margin stands at 17.8% and analysts believe these could be much higher following the acquisition. Bulgari’s sales were doubled and profits rose fivefold after it was acquired by LVMH. Analysts at RBC think that it can expand Tiffany’s operating margin to 23% by 2025 and grow its top line by 7% which will help them deliver a return on acquisition price above its cost of capital. Tiffany’s un-Amazon-able nature, great heritage & its strong presence in Asia pacific will nicely add up to LVMHs growing popularity in Hong Kong & China. The capital intensive nature of the business brings in high barriers to entry, which is an interesting factor at play.
Analysts on Wall Street believe that a fair value of Tiffany would be around $160-$180 range. LVMH is currently offering $135, which is 37% above the undisturbed price. This will be the most expensive deal in LVMH’s history but it is only paying a 17x multiple on the current EBITDA of Tiffany, which is a lot lower than what it paid for Bulgari (22x) in 2011.
Lastly, it’s an EPS accretive deal, which means it’ll boost the group’s EPS upon successful acquisition.
MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in Tiffany & Co. Read our full disclosure policy here.