In November, LVMH, a French luxury goods giant, announced it is buying American jeweler Tiffany & Co as part of a $16.2bn (£12.6bn) deal. The deal came after months of speculation and an earlier rejected offer at $120 per share. LVMH was able to tie the knot after raising its offer price to $135 per share – a shiny premium over Tiffany’s $90 share price in October.
In the classic 1961 film, Breakfast at Tiffany’s, Audrey Hepburn’s Holly Golightly muses that Tiffany’s is a place where “nothing very bad could happen to you”. Can the same be said for LVMH after undertaking this acquisition?
After signing such a large deal for a high premium, it is standard practice for an acquirer to see its stock price fall. LVMH bucked this trend, however, and saw its stock rise as soon as the deal was announced, signalling approval from the markets. Shareholders are fans as well, likely due to the vast wealth of experience LVMH has with revitalizing faltering luxury brands.
LVMH is a portfolio of 75 global luxury brands including Louis Vuitton, Dom Perignon, Christian Dior and Tag Heuer. These assets have been acquired over a number of years, and the parent company has been able to turnaround a number of businesses.
Just a few of the key names in LVMHs’ portfolio of 75 luxury brands
Bulgari acts as a key example. When LVMH took it over in 2011, it had operating margins of 8%. These have now widened to 25% while sales doubled.
Tiffany would sit well amongst LVMH’s other assets as it is a global franchise. Tiffany has 321 stores all around the world including 145 stores in the strategically important Asia continent, where significant growth has been driven by newly rich Chinese buyers.
That being said, Tiffany has been experiencing headwinds in recent years as the business has taken a drumming. The share price slid 40% between mid-2014 and mid-2016, and since then results have been a hit and miss.
An increase in sales in early 2018 suggested a change in prospects for Tiffany, but the US-China trade tensions, a relatively strong US dollar and the Hong Kong protests have hurt tourist spending, causing shares to dip recently. In the first quarter of 2019, Tiffany saw a 25% decline in sales to foreign tourists in the Americas, citing a strong dollar. Tourism accounts for about 12% of Tiffany’s sales in its home region.
Aside from these more transitory effects of decreased tourist spending, a decrease in Tiffany’s sales may be indicative of changing consumer tastes. Analysts at City Index say that the brand is not keeping up with millennials. Currently, the jewelry industry as a whole is struggling. It shrunk 4% between 2017 and 2018, and last year alone, 852 U.S. jewellery retailers shut down, according to a report from the Jewelers Board of Trade. On top of this, millennials aren’t buying diamonds like they used to. Money is one key reason, but for many, it’s also a matter of having different tastes than their parents, Bain and Company noted in its 2018 global diamond industry report.
LVMH clearly sees a great deal of value in Tiffany’s brand. Bernard Arnault, Chairman of LVMH and Europe’s richest man (net worth 106.2 billion USD), said, “We have an immense respect and admiration for Tiffany and intend to develop this jewel with the same dedication and commitment that we have applied to each and every one of our maisons”.
Going off the company’s initial comments, it doesn’t intend to change Tiffany significantly, but it wants to fuel the company’s growth in Europe, where Tiffany has fewer stores, and bolster growth in China. This should be a straightforward strategy for LVMH to execute and generate growth from.
Number of Tiffany & Co. stores by region worldwide in 2018, by region, Source: Statista
LVMH stands to benefit greatly from this acquisition. The parent company already has a world-class jewellery franchise that includes brands such as Bulgari, Hublot, Chaumet, and Tag Heuer. The addition of Tiffany amongst these assets will likely strengthen LVMH’s presence in this market.
At present, LVMH’s existing jewellery brands skew to customers with deeper pockets than Tiffany, which shows that the Tiffany acquisition could allow LVMH to attract even more customers with differing luxury goods budgets, including those with less cash to splash. An added benefit for LVMH is also that the acquisition of another jewellery brand may give them more purchasing power in the market for gemstones and precious metals, which could help reduce costs and improve profit margins in the long run.
At the moment, Tiffany may be something of a diamond in the rough. But under LVMH’s leadership, Tiffany will have scope to develop and expand, with LVMH looking likely to generate a lot of value from the acquisition.
Written by Alexandra Butterworth
Sources and further reading
https://www.cnbc.com/2019/08/29/tiffany-beat-expectations-but-millennials-still-arent-buying-diamonds.html
https://www.fool.com/investing/2019/12/10/why-shareholders-approve-lvmh-acquisition-tiffany.aspx
https://www.theguardian.com/business/2019/nov/25/louis-vuitton-lvmh-buy-tiffany-bernard-arnault
https://www.bbc.co.uk/news/business-50541004
https://www.bbc.co.uk/news/business-50565963
https://www.marketwatch.com/story/tiffany-sales-fall-as-tourist-spending-slows-2019-08-28#:~:targetText=DaveSebastian,the%20comparable%20quarter%20last%20year.
https://www.statista.com/statistics/857587/number-of-tiffany-and-co-stores-by-region-worldwide/