French luxury giant LVMH (OTC: LVMUY) just launched a bid for American jeweler Tiffany (NYSE: TIF) at roughly $120 per share in an all-cash deal. The offer would represent a 22% premium to Tiffany's closing price on Oct. 25 and value the New York-based company at nearly $14.5 billion.
However, Oppenheimer analyst Brian Nagel recently told CNBC that Tiffany would likely reject the bid and wait for a higher offer. The two companies reportedly aren't in active discussions as of this writing, but Tiffany is expected to respond soon. Let's see what the proposed deal could mean for LVMH.
Image source: Tiffany.
Why Tiffany is a vulnerable takeover target
Tiffany's previous CEO, Frederic Cumenal, resigned amid activist pressure in early 2017 after less than two years on the job. Sales slumped under Cumenal, with a 3% decline in 2015 and another 3% drop in 2016, as its growth in North America stalled and its growth in Asia decelerated.
Tiffany subsequently hired Alessandro Bogliolo, who previously held executive positions at LVMH's Sephora and Bulgari, to turn around its business. Bogliolo rebooted the brand for a younger audience with new jewelry designs (like the well-received Paper Flowers collection) and fresh marketing campaigns featuring younger celebrities and inclusive ads with models of different races and sexual orientations.
Bogliolo's strategy worked throughout most of 2017 and 2018, when Tiffany's sales rose 4% and 7%, respectively. But the cracks started to appear over the past three quarters, as its sales slowed to a crawl across all four of its main regions:
|YOY Sales Growth (Decline)||Q2 2018||Q3 2018||Q4 2018||Q1 2019||Q2 2019|
YOY = Year-over-year. Source: Tiffany quarterly reports.
Tiffany mainly attributed those declines to tougher year-over-year comparisons, currency headwinds, and significantly lower spending from Chinese tourists in other countries. They were shopping less overseas due to two main factors: China's economic slowdown and the weaker yuan throttling their spending power, and lower value-added taxes on imported foreign luxury goods in China.
Tiffany once highlighted China as a promising growth market, but it still generates roughly 20% of its Asia-Pacific sales (6% of its total sales) in crisis-wracked Hong Kong, according to Cowen's latest estimates.
In September, Tiffany warned that the ongoing unrest in Hong Kong would likely reduce its full-year revenue and earnings. It also started moving its priciest jewelry into mainland China to reduce its dependence on Hong Kong and overseas tourists. Despite that shift, analysts still expect Tiffany's revenue and earnings to grow just 1% and 2%, respectively, this year.
Why LVMH wants Tiffany
LVMH is faring better than Tiffany for three main reasons. First, it owns a broader portfolio of 75 brands across five main businesses: fashion and leather goods (41% of its revenue in the first nine months of 2019), selective retailing (27% of revenue), perfumes and cosmetics (13%), wines and spirits (10%), and watches and jewelry (8%).
Second, LVMH mainly targets upscale markets instead of a broad range of price tiers like Tiffany. Lastly, it isn't as exposed to the chaos in Hong Kong as Tiffany, and it isn't as dependent on the overseas shopping habits of Chinese tourists.
Part of Tiffany's jewelry collection for men. Image source: Tiffany & Co.
If LVMH acquires Tiffany, it would become the largest brand in its watches and jewelry group, which currently includes six houses: Bulgari, Chaumet, TAG Heuer, Fred, Zenith, and Hublot. That unit generated 4.12 billion euros ($4.57 billion) in revenue in 2018, compared with $4.4 billion in revenue at Tiffany last year.
In other words, the acquisition would roughly double the size of LVMH's watches and jewelry unit, which posted 4% organic sales growth in the first nine months of 2019. That growth rate looks solid, but it was actually the company's slowest-growing division.
LVMH attributed most of the unit's growth to stronger sales of Bulgari jewelry. Therefore, it's wise to expand the unit and bolster its growth by gobbling up Tiffany, one of Bulgari's biggest rivals. Bogliolo, who was previously Bulgari's chief operating officer and the brand's executive vice president for jewelry, watches, and accessories, is also the ideal candidate for converting Tiffany into an LVMH house.
It would inherit all of Tiffany's current problems, but it could cut costs by eliminating redundancies. And it could open new Tiffany stores alongside its other brands, as well as expand Tiffany's reach into new types of jewelry and watches. Those moves could revive consumer interest in the 182-year-old brand and widen LVMH's moat against rival jewelers like Richemont's Cartier.
The key takeaways
It's smart for LVMH to bid for Tiffany as the iconic jeweler struggles with myriad headwinds. It's a good fit, but Tiffany will likely ask for a higher offer -- which could make it LVMH's biggest acquisition since its $13 billion takeover of Dior two years ago.
Editor's note: This article has been updated.
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