Grandmaster Arnault looks to the Tiffany endgame

Grandmaster Arnault looks to the Tiffany endgame

An avid chess player, who enjoys teaching his grandchildren, LVMH chief executive Bernard Arnault is embroiled in one of the most taxing games of his long career.

In his effort to secure — and then tear up — a $16.6bn deal to acquire Tiffany, the US jeweller, the 71-year-old Mr Arnault has deployed a range of chess tactics: decoys, deflections, pins and interference.

Struck last November and originally scheduled to complete before now, Paris-based LVMH said this week the acquisition was no longer possible after the French government intervened to block it, supposedly as part of a trade battle with the US.

But no one thinks that is the end.

“The checkmate move to bring this game to a close will take some time to be played,” said Mario Ortelli, managing partner at Ortelli & Co, an adviser for the luxury industry.

“Tiffany is not an asset that Bernard Arnault does not want. It’s an asset that he does not want at this price.”

The richest man in France, Mr Arnault has risked sparking a political scandal, accused of soliciting government help to get out of the deal, although LVMH has formally denied the allegations. 

Tiffany has hit back by suing LVMH in the US state of Delaware to force it to complete the takeover as planned at $135 per share, or pay damages.

LVMH plans a countersuit to claim that Tiffany, famed for its diamond engagement rings packaged in robin egg blue boxes, mismanaged the pandemic thus invalidating the takeover agreement.

A whirlwind romance

The largest ever takeover in the luxury sector was agreed in very different circumstances last year. Mr Arnault hailed the brand as an “American icon” that would slot perfectly into the LVMH portfolio “to thrive for centuries to come”.

To secure the prize, LVMH raised its bid from $120 per share to $135, a 37 per cent premium to Tiffany’s undisturbed share price at the time and on par with its record peak. 

Strategically, the marriage made sense because LVMH needed to bulk up in watches and jewellery. Such “hard luxury” goods accounted for only 8 per cent of LVMH sales and 6.5 per cent of operating profits last year, while most of its profits came from “soft luxury” goods, such as Louis Vuitton handbags and apparel. 

Before Covid-19 hit, “hard luxury” had been expanding faster, growing at a compound annual rate of 6 per cent from 2010 to 2019, according to Bain. But now sales of luxury goods are set to contract up to 35 per cent this year and fine jewellery by 7 per cent with a recovery not expected before 2023. And Mr Arnault has buyer’s remorse. 

Known as “the wolf in cashmere” for his hardball dealmaking tactics, Mr Arnault began manoeuvring over the summer to find ways to renegotiate.

He quickly ran into a wall of resistance from Tiffany, which argued that the merger agreement between them obliged LVMH to respect the original terms. 

Column chart of Sales by business (€bn) showing LVMH's acquisition of Tiffany would expand its jewellery business and deepen its exposure to the US market

The tensions burst out into the open in June with a story in fashion trade publication WWD that reported concerns among LVMH’s board of directors about the deal. LVMH released a statement promising not to buy shares in Tiffany on the open market, a tactic some had speculated it could use to push down the price, but it pointedly omitted any commitment to the takeover.

The moves were designed to spook Tiffany and its investors but were little more than bluff, given the realities of the merger contract, people close to the situation told the Financial Times at the time. 

They added that LVMH’s only way out of the deal would be to go to the Delaware Chancery Court, where it would need to prove that Tiffany breached the merger agreement and that the pandemic was a “material adverse change”.

Things then quietened down until this week’s drama. On Tuesday, LVMH’s legal team told Tiffany that the French foreign minister, Jean-Yves Le Drian, had asked it to delay the closing of the Tiffany acquisition until January 6 to “support the steps taken vis-à-vis the American government’. 

The letter referred to a move by US president Donald Trump to implement customs duties by that date on certain French industries, including luxury goods, in reaction to France adopting a digital services tax. LVMH told Tiffany that it had to obey what it believed was a legal order from the government and therefore could not complete the acquisition before the merger agreement expired on November 24. French officials have disputed that the letter was a binding request and said LVMH was free to do what it wanted.

The gambit prompted Tiffany to file a lawsuit the next day accusing LVMH of purposely delaying matters and looking for a pretext to get out of the deal. Mr Arnault was blindsided by the decision of the US company to sue them ahead of the deal deadline, said people with direct knowledge of the matter. 

Bar chart of Luxury Jewellery market share, 2019 (%) showing LVMH would close the gap on Richemont with the acquisition of Tiffany

When LVMH shared the letter with Tiffany, it was done with the hope that the executives of the US group would sit down with them to find out a compromise to get the transaction completed, those people said. 

Tiffany’s strong language in the lawsuit and board chairman Roger Farah’s public accusation that LVMH was using “any available means in an attempt to avoid closing the transaction” have led LVMH to take a much harder line than originally planned, those people said.

LVMH has said it believes it can win in court. But Delaware judges have only rarely allowed a buyer to walk away from an agreed deal.

The outcome of the legal process is hard to predict, especially given the wild card of the pandemic and whether it will be considered a “material adverse change” affecting the merger agreement. LVMH has also advanced other arguments.

Losing the legal battle would be the worst outcome for Mr Arnault. Behind closed doors, the billionaire has made it clear to his inner circle that LVMH wants to reach a compromise despite the recent acrimony. 

Several people close to Mr Arnault said that if Tiffany is willing to renegotiate, LVMH would be prepared to sit down and find a way to complete the transaction at a lower price. 

Peter Schoenfeld, founder of US hedge fund P Schoenfeld Asset Management, who owns about $111m of Tiffany shares, said that LVMH was playing a risky game that reminded him of Mr Arnault’s failed effort to buy Gucci some 20 years ago. 

“There is an awful odour surrounding LVMH using a government letter to refuse to close its Tiffany transaction,” he said. “Delaware judges have historically had a sensitive nose to such behaviour and should easily see through this charade. These kinds of aggressive tactics backfired before and led LVMH to lose Gucci to a rival and may lead them to lose the iconic Tiffany brand as well.”

Tiffany also believes it will win in court, and that its business will thrive once the pandemic passes, said people familiar with the matter. But its recovery remains uncertain: the coronavirus has hit tourism, shopping malls and New York City, all of which are big sources of revenue.

Tiffany shares are now trading at around $114, a significant discount to the deal price and some 7 per cent lower than before LVMH said it wanted to pull out but still higher than a year ago — before the deal and before the pandemic. Flavio Cereda, analyst at Jefferies, said: “The share price is telling you that the market does not think this deal is dead.”

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