October 28, 2019 / 3:35 AM / 7 months ago

Breakingviews - Tiffany splurge is affordable indulgence for LVMH

People walk past a boutique of the luxury jewelry retailer Tiffany & Co. in Beijing, China, December 1, 2016. Picture taken December 1, 2016. REUTERS/Thomas Peter - RC1A27DC9700

MILAN (Reuters Breakingviews) - Bernard Arnault has succumbed to Holly Golightly’s allure. The French tycoon’s luxury goods giant LVMH is pursuing a takeover of Tiffany & Co. Adding the jewelry chain immortalised by Audrey Hepburn to a portfolio that includes Christian Dior and Moet & Chandon would be an affordable indulgence. It would also throw down a diamond-studded gauntlet to rivals.

Eight years after swooping on Bulgari, Arnault appears ready to add to his jewelry collection. LVMH had to pay a 60% premium to get its hands on the Italian brand, its first significant foray into the “hard luxury” world of watches and necklaces. Tiffany has extra scarcity value as one of the few truly public companies in an industry full of founder-controlled brands. It would also boost LVMH’s presence in the United States.

According to the Financial Times, the $215 billion group approached the purveyor of blue-boxed trinkets with an offer worth $14.5 billion, a 22% premium to its market value on Friday, but more than 30% above its average price in recent weeks. Though the U.S. company is likely to reject that, Arnault could afford to go higher. An offer worth $16.5 billion – equivalent to about 16 times Tiffany’s expected EBITDA this year – would leave LVMH’s net debt well below 2 times EBITDA.

LVMH investors might swoon at such a price tag, though. Tiffany’s sales are projected to grow at a lower rate than the French group’s. Without significant cost savings, the return on LVMH’s invested capital would be less than 4% by 2021, according to Breakingviews calculations based on Refinitiv estimates. That’s well below Tiffany’s 8.6% weighted average cost of capital, as estimated by Morningstar analysts.

Arnault might be able to get away with paying less, especially if he can charm Tiffany Chief Executive Alessandro Bogliolo, who previously worked at Bulgari. But rivals are unlikely to sit still. A Tiffany takeover would be a direct challenge to Richemont, owner of Cartier, which dominates the hard luxury world. It would also deprive Kering of a potential target to reduce its dependence on slowing fashion brand Gucci. “Nothing very bad could happen to you” at Tiffany, Holly Golightly said in “Breakfast at Tiffany’s”. Shareholders in the company’s potential suitors will hope she is right.


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