No breakfast at Tiffany’s: Will the LVMH-Tiffany deal go through?
When LVMH proposed to add Tiffany to its illustrious collection of high-value brand names in late 2019, the proposition seemed favourable to all parties. LVMH's shares showed a quick uptake in anticipation of the acquisition, whilst the struggling Tiffany saw a way out of its financial difficulties. It appeared to be a match made in heaven. Yet, as with many other proposed M&As, the Covid pandemic took its toll and the optimistic collaboration between the two made way for scepticism, regret, and animosity.
The two parties had agreed a $16.2bn deal, which would have made the deal the biggest in the luxury market ever. This would have enhanced LVMH’s varied portfolio, which already includes high-end luxury brands in the sectors of fashion, perfumes, watches, wines, and spirits. The deal was expected to reach completion sometime in the middle of 2020, but the pandemic delayed this process as a series of issues arose. The pandemic precipitated the faltering of the global luxury sector, with both LVHM and Tiffany suffering supply-chain problems and reduced revenues. It is feared that the appetite for luxury goods might not recover to its pre-pandemic levels until 2023 and sales for luxury goods could be down by as much as 45% in 2020 compared to last year.
Faced with such issues, it is easy to see why LVMH may have had second thoughts about its $16.2bn investment and it attempted to renegotiate the purchase price in the spring of 2020. Tiffany did not help its own position as it kept paying dividends to its shareholders, even as the pandemic slushed earnings. This gave cause to LVHM to claim that their agreement was breached and that it was no longer obligated to complete the acquisition, announcing its intention to withdraw in September 2020. Tiffany does not agree with LVMH’s assertions and has initiated a lawsuit to force the deal through, or at least claim damages in lieu of completion.
It is vitally important to understand LVMH’s claims as they are based on terms which are commonplace in most acquisitions and any judicial judgment on their operation would affect a significant number of other planned transactions.
Material Adverse Change clauses, also known as MAC clauses, provide that when there is a change in the state of the target company of the acquisition, which significantly reduces its value between the date of the agreement and completion, the parties may choose to cancel the transaction. Sellers are usually advised to reject the inclusion of such clauses in their agreements, as their operation is contentious. It is unclear what circumstances a MAC clause is intended to cover and there is often a debate as to whether a change is material.
The impact of the pandemic and the potential tariffs to be imposed on French goods by the US government may both be argued to be events that materially and adversely affect the value of Tiffany. Yet, none of the parties have disclosed whether their contract included a MAC clause in what is likely an indication that Tiffany successfully resisted its inclusion. If the agreement does include such a clause, its exact wording must be considered within the context of the two parties to determine what events where to be covered by it. It remains to be seen whether a MAC clause will have a determinative effect on the outcome of this acquisition.
A stronger card in the hands of LVMH is the decision of Tiffany’s board to pay out full dividends to its shareholders despite the financial impact of the Great Lockdown. Forbes has estimated that Tiffany has already paid out $70 million to its shareholders in 2020, with as much planned to be paid out in the company’s next dividend payment round in November. This was despite the 45% and 29% fall in Tiffany’s sales for the 1st and 2nd quarter of 2020 respectively, compared to the same periods in 2019.
Acquisition agreements often contain a myriad of terms regarding the conduct of business of the target company prior to completion and it is highly unlikely that LVMH would agree to a deal that did not include such terms. These terms usually cover the sale or purchase of significant assets, a change in the company’s focus, the obligation to disclose financial information to the acquiring company and, crucially, they usually limit the ability of the sellers to drain the target company of its assets. Such terms should have prevented Tiffany’s board from distributing excessive dividends, especially considering the financial difficulties brought about by the pandemic. These payments are likely to form the crux of LVMH’s claims in court if the parties don’t agree on a settlement soon and a legal battle could ensue as to whether a payment of dividends in the midst of the Great Lockdown should be considered an asset leakage attempt.
The mysterious letter
A further complication arose with LVMH’s revelation of their receipt of a letter from the French Minister of Foreign Affairs in early September. This letter asked LVMH to delay the completion of its acquisition of Tiffany until the end of 2020, presumably so that when the acquisition is completed, the condition of US-France trade will be clear. Trade between the two has been destabilised as tensions between the U.S. and France have escalated, with each nation deliberating the imposition of trade tariffs on the other.
These tensions stem from the unveiling of the world’s first digital services tax by France. This digital service tax aims to tax the revenue of global tech firms directly, rather than relying on complex calculations to determine the market share of a firm and its local revenue. The tax primarily affects US companies, and this has not gone unnoticed in the White House. The US has already retaliated by announcing plans to impose a 25% tariff on various French goods, including many of the goods in LVMH’s and Tiffany’s product range, though a temporary deal was brokered to delay the implementation of these tariffs.
It is in this context that the French minister intervened. The legal effect of the minister’s letter has been questioned though. A French official stated that the letter was never intended to be a binding order obliging LVMH to cancel the acquisition. The content of the letter remains unknown to the general public, whilst even Tiffany has not yet seen the original draft of the letter. It is likely that the only way that the letter will be made public is when the parties go to court; something which seems highly probable.
The outcome of this merger still stands in the balance. There are suggestions that the deal might still be completed, albeit at a lower price. The fact that LVMH has applied for approval of the acquisition from the European Commission, the relevant competition law regulator in the EU, may be an indicator of LVMH’s intention to complete the deal if the price is lowered, though the mega-conglomerate still argues that the merger is to be called off. Whatever the result, this merger illustrates the difficulties faced by many companies in this hectic year and it is likely to set the tone for the future of many of the acquisitions which were agreed in the pre-Covid era. This deal is one to watch.
UPDATE: 29 October 2020
The deal is salvaged
On the 28th of October 2020, LVMH and Tiffany announced that after intense negotiations the two parties agreed to proceed with the transaction, albeit at a lower price. LVMH has saved a rather modest $425 million, representing a 3% discount on the previously agreed $16.2 billion deal, whilst Tiffany’s shareholders will still receive $70 million in dividend payments prior to completion. The announcement followed a stronger-than-expected recovery in the luxury sector, but the fact that the purchase price was reduced due to the pandemic’s impact could be an indicator of a forthcoming trend in future M&As.