The merger would have been the largest in the luxury retail sector. But Paris-based LVMH pulled the plug this week on its acquisition of Tiffany after the French government requested a delay to assess US tariffs.
Image: picture-alliance/AP Photo/M. Lennihan
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A $16.2-billion (€14-billion) buyout by French luxury giant Moet Hennessy Louis Vuitton (LVMH) of US jeweler Tiffany & Co. fell through this week after the French government expressed fears over US tariffs on French goods.
After months of talks between the two sides, LVMH finally announced plans last November to acquire Tiffany, an American icon founded in 1837. LVMH, which had coveted the US jeweler for years, is the world's largest luxury goods conglomerate and many saw the deal as a lifeline for its US counterpart.
But LVMH's withdrawal had been coming for some time, after it sought to renegotiate the takeover agreement in March at the start of the lockdowns and a big fall in Tiffany's sales. In May its senior management reportedly began cutting off even informal discussions with senior Tiffany personnel.
On Wednesday Paris-based LVMH said in a statement it could not complete the deal with Tiffany "as it stands," citing a request from the French government on August 31 to delay the deal beyond January 6 because of the threat of US tariffs on French goods.
The US has been threatening tariffs on luxury French products in retaliation for taxes on technology companies that have hit American firms like Amazon, Facebook and Google.
Tiffany & Co.'s flagship store in New York City is currently being renovatedImage: picture-alliance/AP Images/Star Max
Litigation could prove costly
Tiffany immediately sued to enforce the deal, asking a Delaware court to force LVMH to complete the merger or award Tiffany damages. The initial agreement allows Tiffany to pay a termination fee of $575 million to walk away from the deal, but LVMH doesn't have the same option.
The New York-based firm claims that LVMH's argument for halting the buyout has no foundation in French law and that LVMH hadn't attempted to seek the necessary antitrust approval. LVMH said the necessary approvals were expected in October.
Tiffany said LVMH had also breached its merger obligations by excluding the retailer from its discussions about the transaction with the French government. In a securities filing, Tiffany said that although LVMH had informed the jeweler it had received a letter from the French government, it had not seen an original draft of that letter.
On Thursday, the Paris-based conglomerate — whose holdings include Christian Dior, Louis Vuitton, Moet & Chandon, Bulgari and Sephora — issued a statement threatening legal action of its own. Among other things, LVMH criticized Tiffany for issuing dividends even as it was losing money.
A hard-fought deal
In what would have been — and could still be — the sector's biggest-ever buyout deal, LVMH agreed to raise its offer several times, finally accepting $135 a share, which translated into an equity value of $16.2 billion.
It was an all-cash figure that was 22% higher than the New York-based company's share price in November 2019. The deal was expected to be completed by this June, with a merger deadline of August.
The acquisition would consolidate the French company's position as a big player in the watch and jewelry sectors. It would reportedly double the size and profitability of its portfolio in that category, which includes brands like Bulgari, Chaumet, Hublot and Tag Heuer, and accounts for roughly 9% of LVMH sales.
Tiffany faces uncertain future
Tiffany had been trying to transform its brand, but is facing uncomfortable prospects beyond a costly legal battle with LVMH. In the six months ending on July 31, Tiffany had revenue of $1.3 billion compared with $2.05 billion in the same period of 2019. Tiffany operates 321 stores worldwide and reported $4.4 billion in revenue last year.
LVMH said second quarter sales fell 38% on a like-for-like basis to €7.8 billion, or $9.2 billion, after a 17% decline in the first quarter. In 2019, LVMH declared €53.7 billion in revenue, a 15% increase over the previous year. The company is active in 70 countries with nearly 5,000 stores and 163,000 employees.
In the end a deal may eventually be completed, potentially at a discounted price as its value has been eroded by wider industry troubles caused by the coronavirus pandemic. Global luxury sales are set to contract 25-45% in 2020, according to estimates by Boston Consulting Group.
In August in the US a number of major retailers filed for bankruptcy protection to try to save their businesses, including the 118-year-old department store chain JCPenney. For mergers and acquisitions the new world order has changed the rules, with a number of other deals called off or in doubt. The battle brewing between two of the biggest names in global luxury is one the biggest examples of this fracturing of deals agreed before the pandemic devastated retailers.
Bankruptcy: Going out of business during the COVID-19 pandemic
The coronavirus has upended the business world. Already untold small companies have silently disappeared and many big companies have declared bankruptcy.
Image: DW/I. Banos-Ruiz
Just boarded up or closed?
Since some places are opening up and others are under stay-at-home orders, it is hard to distinguish between a shop that is temporarily closed and one that is just gone. We are still in the middle of global chaos. Add the fact that bankruptcy and other legal proceedings are slow and it becomes clear that we are only dealing with things from the start of the year. The first big wave is yet to come.
Image: picture-alliance/dpa/C. Gateau
Small retailers: going quietly
Since many stores have been forced to close for weeks or even months, it's no surprise that retailers have been hit hard by the coronavirus pandemic. J.Crew, a preppy US retailer, declared bankruptcy and Esprit said it would close all its stores in Asia. Because of online shopping many of the companies were already on shaky ground before COVID-19 came along. The pandemic just hurried things along.
Image: picture-alliance/Photoshot/L. Ying
Big retailers: The bigger they are
In the US, high-end department store Neiman Marcus is looking for bankruptcy protection, while 118-year-old JCPenney with its 800 stores filed for Chapter 11 in mid-May. Experts think more will follow. Germany's largest department store chain, Galeria Karstadt Kaufhof, is rumored to be looking into all its options. Whether these companies will just slim down or close altogether remains to be seen.
Image: picture-alliance/dpa/O. Berg
Charities: When the helpers need help
In the UK, a recent study concluded that one in 10 charities may close by the end of the year. They face the double threat of increased demand for services and less money coming in through fundraising. Again it is small local groups working in social care and disadvantaged communities that are most vulnerable. But even some famous groups like the National Trust are facing a steep cliff.
Image: picture-alliance/dpa/J. Güttler
Restaurants: A table for no one
As mom-and-pop restaurants go out of business, many predict that the world will soon only be left with big national or international chains. But even some large chains were not on solid enough footing to pull through the COVID-19 closures. In Germany, Vapiano, a popular eatery, started bankruptcy proceedings and put itself up for sale. Maredo, a steakhouse chain, closed a third of its restaurants.
Image: picture-alliance/SvenSimon/F. Hoermann
Tourism: On a wing and a prayer
American car rental giant Hertz hit the skids in May because no one was renting cars. Its CEO quit, they filed for bankruptcy and laid off 10,000 employees in North America. The rest of the tourism industry didn't do much better. Lufthansa took a €9 billion ($8 billion) aid package from the government and Virgin Australia entered voluntary administration, though it's still operating some flights.
Image: Imago/R. Peters
Oil: No longer black gold
As the price of oil tanked because of low demand, many in the once robust industry took cover. In April, Diamond Offshore Drilling, Whiting Petroleum and Ultra Petroleum filed for Chapter 11 bankruptcy in the US. But they are not calling it quits. Each say they are negotiating to restructure their debt with creditors and will soon be back in the black. They just need travel to get back to normal.
Image: Imago-Images/ITAR-TASS
Sports: Playing to empty stadiums
For months, orchestras, theater groups and sport teams have been mothballed or just play in front of cameras instead of thousands of fans. Besides missing the rush from the crowds, the groups are missing out on millions in ticket money and advertising. In mid-June, German professional soccer team FC Kaiserslautern announced it was entering bankruptcy proceedings. Experts think more will follow.
Image: picture-alliance/dpa/U. Anspach
A dismal Q2 for 2020
The past few months have been dramatic, but many have had the luxury of a government cushion in the form of subsidies or loans like many freelancers in Germany. The true economic scale of COVID-19 lockdowns will only come to light in the second half of the year. That's when subsidies will end and courts will have caught up and we will be buried in an avalanche of bankruptcies and unemployment.
Image: Reuters/D. Ryder
An opportunity in disguise
Some see bankruptcy as a badge of pride, some as shameful. But it doesn't mean the end of the road. It has long been used to restructure and come out stronger. Henry Ford went bankrupt before starting the company we know today. During the 2008 financial crisis, GM and Chrysler filed for bankruptcy and made it. The coronavirus epidemic will cause pain — it may also bring about change for the good.
