International Policy Digest

Business /24 Sep 2020
09.24.20

Diamonds and Dividends: The Messy Saga of LVMH and Tiffany’s Broken Engagement

The marriage between French luxury goods conglomerate LVMH and prominent New York jeweler Tiffany’s was set to shake up the luxury goods sector. The whopping $16.2 billion deal was the largest ever concluded in the industry, a capstone on LVMH chairman Bernard Arnault’s decades of acquisitions which built LVMH up into the world’s largest luxury goods firm by revenue. It promised to hand LVMH an “American icon” to add to its portfolio of well-known brands and promised to bring know-how and investment to Tiffany to pull the jewelry business out of a sales slump and help it expand beyond its historic core market.

The promising partnership, however, has now turned to acrimony. The two luxury firms will face each other in a Delaware courtroom in January after LVMH pulled out of the deal earlier this month. LVMH cited both a French government request, which it considers legally binding, to delay the deal’s closing until at least January 6 due to trade tensions between Paris and Washington, as well as Tiffany’s “disappointing” financial results in recent months. The case, as some commentators have noted, is the highest-profile illustration to date of how the coronavirus pandemic has materially changed business outlooks and made deals that seemed appealing a year ago impossible to countenance in the current climate.

Though LVMH had argued that the complex case required an even longer timeline, the January trial date was nevertheless a setback for Tiffany, which had hoped to present its side of the argument before the deadline to close the deal on November 24th. According to the New York jeweler, its business will be significantly disrupted if LVMH does not go ahead with the deal which valued its shares at $135 each, on part with its all-time peak stock market performance.

The coronavirus pandemic, however, has provoked a sea change in the luxury goods market, with the industry now set to contract by much as 39%. The hit has not been evenly distributed across the sector, however, with a handful of larger groups—including LVMH, as well as rival Kering—outperforming smaller competitors.

The fact that some parts of the luxury goods sector have coped with the unprecedented public health and financial crisis better than others has bolstered LVMH’s argument that Tiffany has been so badly mismanaged through the crisis that its sinking fortunes constitute a material adverse event which allows the French luxury titan to walk away from the deal.

There’s no doubt that Tiffany’s 2020 financial performance was not what LVMH imagined when it agreed to buy the jeweler last November—Tiffany’s sales fell 45% in the three months ending April 30, notching up a $64.6 million loss. The French firm has taken particular umbrage at Tiffany’s decision to pay out dividends as usual while the bottom was falling out of its revenue; LVMH itself cut its dividend by 30% in response to the pandemic-induced strain on its ledger.

Since its IPO in 1988, Tiffany has never failed to make a quarterly dividend payment to its shareholders. The jeweler has underscored the fact that, at the time LVMH agreed to buy Tiffany, it was aware of the firm’s policy of paying dividends out consistently, including during periods of economic downturn. Sources recently told Forbes, however, that Tiffany never would have agreed to pay out a staggering $140 million to shareholders in May and August of this year if it hadn’t thought that it was about to be taken over by LVMH, sparking the French firm’s concerns that Tiffany paid out the substantial dividends assuming that LVHM would cover its losses.

Tiffany is no doubt hoping that the legal back-and-forth will draw attention away from the details of how it managed its finances during the pandemic. While the legal battle between the one-time partners continues in the United States, with LVMH filing a countersuit, the wheels of regulatory approval are still turning. LVMH confirmed on September 18th that it has submitted the proposed acquisition to European Union antitrust authorities and apparently expects to receive clearance before the original November 24 deadline.

The LVMH-Tiffany deal is the most significant merger to fall apart during the current crisis, but it’s not the first. Private equity firm Sycamore Partners and lingerie brand Victoria’s Secret parted ways earlier this year after Victoria’s Secret closed its U.S. stores and furloughed most of its workers amidst the pandemic—and it almost certainly won’t be the last.