By Matthew Dalton and Suzanne Kapner
Tiffany & Co. shareholders are expected this week to approve
a merger with LVMH Moët Hennessy Louis Vuitton SE that would give
the French luxury giant a big cut of the high-end jewelry market
and close months of drama that nearly killed the $15.8 billion
agreement.
Wednesday's vote is also expected to cap a deal in which LVMH's
controlling shareholder, French billionaire Bernard Arnault, didn't
get his way.
Mr. Arnault fought for months to renegotiate the merger after
the Covid-19 pandemic threw the luxury industry into turmoil. He
asked the French government for help getting out of it and later
enlisted a Rothschild & Co. banker to conduct back-channel
talks with Tiffany, according to people familiar with the matter.
Mr. Arnault, upset over Tiffany's insistence on paying full
shareholder dividends before the deal closed, demanded the jeweler
lower the deal price by 11%, the people said.
Tiffany declined and pressed ahead with a lawsuit, filed in a
Delaware court, to enforce the initial merger agreement.
In the end, LVMH agreed to buy Tiffany at a 2.6% discount from
the original deal price. Tiffany made a $70 million dividend
payment last week.
Mr. Arnault decided he would rather own Tiffany at a price close
to the pre-pandemic agreement than continue to fight, a person
familiar with the situation said.
Now he faces the challenge of reviving Tiffany at a time when
the brand and the broader industry have suffered significant
damage. LVMH's own lawyers, in a counter lawsuit in September, said
the pandemic left the retailer with "no end to its problems in
sight."
Among them: Many big-spending tourist shoppers who travel the
world buying luxury goods have stayed at home due to the virus,
depriving Tiffany of a key source of revenue. Tiffany depends
heavily on mall stores in the U.S., retail locations that have been
hurt this year.
"The sharp decline in foot traffic in malls, which are at the
heart of Tiffany's retail strategy, will have a significant
long-term detrimental impact on the company," LVMH said in its
lawsuit.
Those problems come on top of other weaknesses, such as a
product range skewed toward bridal jewelry at a time when fewer
couples are getting married, analysts say.
"Tiffany is big on bridal, which is not the future," said Erwan
Rambourg, a luxury-goods analyst at HSBC. Inside LVMH, Mr. Rambourg
said, "the products will evolve dramatically. I think the stores
will change dramatically as well."
A Tiffany spokesman declined to comment. Before the pandemic,
the company had been working to revitalize its image, particularly
with younger shoppers.
Tiffany retains much of the sparkle that drew Mr. Arnault in the
first place, in particular a brand name that is one of the most
recognizable in the luxury business.
Mr. Arnault had been eyeing Tiffany for years before making an
offer to buy the company in October 2019 for $120 a share. After
several weeks of negotiation, LVMH struck a deal to buy Tiffany for
$135 a share, close to the company's all-time high.
Weeks later, the first cases of the coronavirus were reported in
Wuhan, China. By March, luxury boutiques across the world closed as
major economies went into lockdown.
Over the summer, LVMH representatives asked French Finance
Minister Bruno Le Maire for a letter that would lay the grounds for
the company to renegotiate or pull out of the merger agreement,
French officials said. Mr. Le Maire refused.
On Sept. 8, LVMH told Tiffany that it had received a letter from
French Foreign Minister Jean-Yves Le Drian asking the company to
delay its purchase of Tiffany until Jan. 6, 2021, to help France in
international tax and tariff negotiations with the U.S.
government.
The next day, LVMH said it was pulling out of the deal. Tiffany
promptly filed a lawsuit seeking to force LVMH to buy the company
or pay damages. Tiffany Chairman Roger Farah said in a statement
the same day that LVMH had "unclean hands," suggesting that the
company had asked the French government to write the letter. The
phrase infuriated Mr. Arnault and LVMH's management, according to a
person familiar with the situation.
"That was too much," the person said.
On Sept. 16, Tiffany's adviser on the deal, Blair Effron at
Centerview Partners, received a call from a French banker, Grégoire
Heuzé, then at Rothschild in Paris. Mr. Effron was surprised to
hear from Mr. Heuzé and not from bankers at Citigroup Inc., which
had been working for LVMH on the deal, some of the people said. Mr.
Heuzé had previously advised Mr. Arnault in 2017 on a transaction
uniting LVMH and fashion house Christian Dior SE.
Mr. Heuzé suggested LVMH would be interested in settling. Mr.
Effron relayed the message to Mr. Farah, who said, "No thanks. We
like our chances of winning in court," people familiar with the
discussion said.
In early October, Mr. Heuzé told Mr. Effron that LVMH would be
willing to settle for $120 a share, down from the original price of
$135. Mr. Effron replied that Tiffany would be unlikely to accept
such a large discount, according to regulatory filings.
On Oct. 15, Tiffany released preliminary results for August and
September 2020 that showed its business had begun to stabilize.
World-wide sales had decreased slightly but operating earnings had
jumped 25% from a year earlier. The company also reported strong
e-commerce sales and growth in China.
On Oct. 18, Mr. Heuzé raised the offer to $131 a share,
according to the filings. Mr. Effron responded that the price would
need to be $132 a share and that Tiffany would likely require an
"airtight" contract that would prevent LVMH from walking away,
according to the filings.
Mr. Heuzé said LVMH was prepared to settle for $131.50 a share.
Mr. Farah felt it would be worth accepting a small discount for the
certainty of getting a deal done, the people said. The two
companies announced an agreement at the end of October, with LVMH
paying $131.50 a share. In November, Mr. Heuzé left Rothschild to
join Centerview's Paris office.
The discount saved LVMH $440 million, less than 1% of its 2019
revenue. Those savings were reduced by the $141 million that
Tiffany paid in dividends in August and December, which LVMH could
have avoided by completing the deal more quickly.
"It seems it was more of a question of principle," Mr. Rambourg
said. "Was it worth the time spent and the cost of legal action? I
don't know."
Write to Matthew Dalton at Matthew.Dalton@wsj.com and Suzanne
Kapner at Suzanne.Kapner@wsj.com
(END) Dow Jones Newswires
December 28, 2020 07:43 ET (12:43 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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