Diamonds, it turns out, are not forever. Bernard Arnault, dealmaking boss of French luxury empire LVMH, appears to be getting the jitters over his swoop on Tiffany, purveyor of engagement rings to the unimaginative. Lowering the terms or backing out would be tough. LVMH says it will not for now buy the US jeweller’s shares on the open market. That was one way it could have lowered the $16.2bn equity price tag — the stock has been trading below the offer price.
Tiffany’s sparkle has certainly dulled. Coronavirus and protests in the US and Hong Kong have pummelled demand for pricey gewgaws. Global luxury sales will fall as much as 35 per cent this year, says consultancy Bain. Analysts reckon Tiffany’s earnings will roughly match that slide, according to S&P Global.
That leaves LVMH’s offer, generous at the outset, looking incredibly steep. The offer was based on an enterprise value-to-trailing ebitda ratio of 17, more than 50 per cent higher than Tiffany’s 10-year average at the time. On the same parameters — although admittedly without an M&A premium — Hong Kong-listed peer Chow Tai Fook trades on 13.5 times.
The $135 per share bid supported Tiffany stock at around that level, even as China — a key market — was locking down to stop the spread of coronavirus. Investor nerves did not falter until the pandemic hit Europe’s shores in early March. Tiffany now trades at about $114, reflecting fears the deal will founder.
Not for nothing is Mr Arnault known as “the wolf in cashmere”. He has 35 years in the luxury industry under his Louis Vuitton belt, chalking up 40 deals in the process. If anyone can tweak irksome terms, he can.
Still, lawyers to LVMH and Tiffany appear to have drawn up a pretty tight pre-nup. Extenuating circumstances are circumscribed and mostly relate to breaches. The costs for backing out are high: should Tiffany pull the trigger it could face a $575m penalty.
Other bidders have sought to redraw deals signed in less fraught times, but doing so carries big risks in this case. Tiffany, like some of its gems, has rarity value — there is no Plan B acquisition that would match it.
Besides, Mr Arnault can afford some perspective. His own — paper — wealth had been dented to the tune of $30bn by early last month, calculates Bloomberg. That is almost enough to buy Tiffany twice over.
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