Bernard Arnault, chief executive of LVMH. Photo / AP
At the opening of a Louis Vuitton leather factory in Texas last month, President Donald Trump was given a hint about an upcoming deal that would be the luxury sector's biggest ever.
"I told the president I would buy something significant in the US, but I didn't tell him the name," said Bernard Arnault, chief executive of LVMH, the French luxury group that owns Louis Vuitton and has now agreed to buy Tiffany & Co for US$16.6 billion ($25.8b).
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Only two days before the ribbon-cutting ceremony, where the guest appearance by Trump caused controversy for LVMH, Arnault had sent a lieutenant to New York to approach Tiffany.
Antonio Belloni, group managing director at LVMH, invited Alessandro Bogliolo, chief executive of Tiffany, for lunch at the Clocktower restaurant in the Edition hotel and presented him with a letter offering to buy the US company for US$14.9b, or US$120 a share.
He laid out LVMH's vision for how the world's largest luxury group could spare Tiffany from the demands of quarterly reporting and invest over the long term to restore the lustre of a brand known for its robin's egg blue boxes and diamond engagement rings.
Despite Arnault's confidence during his meeting with Trump that the deal would be concluded, the initial reaction among Tiffany's camp was that the price was too low.
In addition, after LVMH's interest became public, Tiffany's advisers received a number of inquiries from rival luxury goods groups.
But none of the alternative approaches were seen as compelling and talks continued with Arnault's group, with LVMH advised by Citi, JPMorgan and Skadden and Tiffany advised by Centerview, Goldman Sachs and Sullivan & Cromwell.
Earlier this month LVMH informally increased its offer to close to US$130 a share, prompting Tiffany to open its books. Then on Sunday the boards of both companies met to approve a higher US$135-per-share bid from LVMH for Tiffany — representing a premium of about 37 per cent over Tiffany's undisturbed share price and an increase in the takeover offer by about US$600 million.
"Tiffany is an American icon," Arnault told the FT on Monday. "For a long time it was on our list of potential names that could fit well in our portfolio of luxury brands […] It's the only real American luxury house with a very long history."
Founded by Charles Lewis Tiffany in 1837, Tiffany's relationship with France stretches back almost as far. It helped establish its reputation as a jeweller when in 1887 it bought some of the French crown jewels — Diamants de la Couronne — at auction at the Louvre.
The company's flagship store on New York's Fifth Avenue was immortalised in the 1961 film Breakfast at Tiffany's starring Audrey Hepburn but strong brand recognition has not prevented it suffering from weak tourist spending, a strong dollar and declining footfall.
It still attracted a premium valuation. The all-cash bid for Tiffany values its shares at US$16.2b, or US$16.6b including net debt. The enterprise value of 17 times earnings before interest tax, depreciation and amortisation is more than 50 per cent higher than Tiffany's 10-year average.
"In the end, there's scarcity value here," said Flavio Cereda, an analyst at Jefferies. "If you want to increase your presence in the hard luxury category [jewellery and watches] there's lots of small companies you can buy, but there's no real big companies. Everybody would like to buy Rolex or Patek Philippe, but they're officially not for sale. So this is the only big one."
The acquisition of Tiffany will catapult LVMH to the top of the rankings for market share in branded jewellery, one of the best-performing luxury categories in 2018, which Bain consultants predicts will grow a further 7 per cent this year.
By adding Tiffany to its stable of brands, LVMH will more than double its market share in jewellery to 18.4 per cent, surging ahead of Johann Rupert's Richemont, at 14.8 per cent, according to Bloomberg Intelligence. Until now Richemont, owner of Cartier and Van Cleef & Arpels, has long dominated this part of the industry.
Mario Ortelli, managing partner of Ortelli & Co, a luxury advisory company, said the price was "not outrageously high". "LVMH can extract a lot of value from Tiffany because the market for branded jewellery is growing very fast […] One of the attributes that make a jewellery brand successful is heritage. That's why you can't build up a brand overnight."
For Arnault, the deal caps four decades of voracious acquisitions in which he transformed LVMH from a near-bankrupt textile company into the world's largest luxury goods company by revenues, with a stable of brands that includes Christian Dior, Moët & Chandon champagne and the Venice Simplon-Orient-Express train service.
The deal underlines the growing firepower of LVMH, which generated €46.8b ($80.3b) in sales and €5.5b in free cash flow last year. After its shares rose 60 per cent this year, it now has a market value of more than €200b, comfortably the biggest public company in France.
LVMH will issue bonds to finance the acquisition and said it expected it to be earnings accretive from next year, adding €500m-€600m to operating profit as of 2020.
The tie-up underscores the polarisation within the luxury industry between top-performing groups such as LVMH, Kering and Hermès, which benefit from size and scale, and some smaller brands such as Tiffany, which are struggling.
Part of Arnault's plan for the brand is expanding its appeal beyond its core markets of the US and Japan. He said he saw "a lot of untapped potential", notably in Europe and China.
LVMH will seek to use the approach that it applied to Bulgari. Since it bought Bulgari for US$5.2b in 2011, LVMH has invested in the stores to boost the sales density; focused the product ranges, ramped up marketing and communications, and elevated the brand to focus on high-end jewellery. Under LVMH's ownership, sales have doubled and profits have increased fivefold.
"We expect to bring Tiffany time and capital, which are two things that aren't easy to get when you're quarterly reporting to the stock market," LVMH's chief financial officer Jean-Jacques Guiony said on a call with analysts.
Arnault, who on Sunday had phoned Trump to brief him on the completed deal, told the FT: "My goal with Tiffany — as it is for Louis Vuitton or Dior — is that desirability for the brand should be higher in 10 years' time than it is right now. Profit and growth will be a consequence of that."
- Additional reporting by Eric Platt.
LVMH's deal for Tiffany highlights two key trends: the luxury sector is on a sustained winning streak with little sign of abating, and consolidation is central to success. This has been reflected in stock prices, writes Anna Gross.
"What is very interesting is that many investors fear a global recession not too far in the distance, but despite that it doesn't reflect in the share price of these luxury companies," said Gerrit Smit, head of equity management at wealth manager Stonehage Fleming.
"Most of these shares are at all-time highs but you can't really say that for any of the other sectors."
Though political turmoil has crimped demand in Hong Kong, one of the biggest luxury markets, the shortfall has been plugged by swelling demand elsewhere — most notably China.
Luxury groups have had some of the highest rates of "net positive revenue surprises" throughout the 2019 results season compared with other European sectors, according to UBS. LVMH, Hermès, Tiffany and Cristian Dior all cited strong momentum in China in their results.
"If you look at the long-term trend at LVMH, Kering, Hermes you see astonishing share price growth," said Edouard Aubin, a luxury goods analyst at Morgan Stanley.
While many European export stocks have experienced heightened volatility in response to trade tensions between China and the US, as well as Brexit uncertainty, luxury, which is dominated by European operators, has steered a steady growth trajectory.
Shares in Kering, Christian Dior and Hermès have risen 30-40 per cent this year. LVMH has climbed 60 per cent.
"It's the only exporting sector that cannot be negatively impacted by competition from China or the US," said Smit. "China is only an opportunity, it's not a threat."
Chinese nationals account for more than 30 per cent of luxury expenditure, but 70 per cent of growth in demand, according to analysis by Morgan Stanley. The nation's share of luxury goods spending is forecast to reach 46 per cent by 2025.
Emerging market consumers are not only lifting luxury spend at home, they are also supporting them abroad. LVMH is expanding in France and is banking on affluent tourists to account for more than half of its sales there.
"The emerging consumer has become a global traveller, not only to the first world but also to other emerging countries," said Smit. Two-thirds of Chinese spend on luxury takes place when travelling internationally, according to Bain, and luxury tourism to Europe has been particularly attractive because of the weaker euro.
Big luxury brands have also been fortified by consolidation. LVMH, Kering and Richemont have all grown through acquisitions while smaller players have sought the security of bigger groups, such as Versace, which was sold to Michael Kors, now Capri Holdings, for US$2b in late 2018.
"Performance polarisation in the luxury sector remains high, with bigger luxury groups grabbing a bigger slice of the pie at the expense of many smaller players," said Rogerio Fujimori, an analyst at RBC Capital Markets.
Analysts at UBS agree: "The negative implications for the rest of the sector seem under-appreciated."
Written by: Harriet Agnew and Michael Pooler
© Financial Times
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