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Acquisition of Tiffany by LVMH: An Analysis


  • Overview of the deal of acquisition by LVMH
  • Company profiles of Tiffany and LVMH
  • How the deal will benefit the Companies

 

The holiday shopping month of November witnessed a new consolidation in the luxury world when Louis Vuitton Moet Hennessy (LVMH) announced the acquisition of the luxury jeweller, Tiffany & Co. (Tiffany). The deal was finalized on 25th November for USD 16.2 billion (EUR 14.7 billion, USD 135 per share) which is USD 2 billion higher than the initial offer given to Tiffany in October.

LVMH is a French luxury group that owns a diverse portfolio of 79 luxury brands in different genres. Over the years, the company has expanded in terms of product line and region through acquisitions to become one of the largest global luxury conglomerates. Some of the notable brands owned by the company include Louis Vuitton, Christian Dior, Fendi and Sephora amongst others. The company has 4,592 stores across 70 countries, out of which 783 are in United States, 1,667 in Europe and 1,711 in Asia Pacific. Asia Pacific is the highest contributor to the revenue of LVMH with 36% share, followed by Europe contributing 29% and the United States contributing 24% amongst others. In terms of products, Fashion and Leather goods account for 39% of the company’s revenue, Wines & Spirits segment contributes 29% of the revenue while Watches and Jewellery segment contributed a meagre 8.7% revenue to LVMH in 2018. Balance comes from different product lines.

With the acquisition of Tiffany, LVMH is getting an access to the legendary American luxury jewellery brand that is as old as 1837. Tiffany has a well-balanced portfolio of high-end jewellery, engagement jewellery and designer jewellery. Tiffany is a vertically integrated company and with this acquisition, LVMH will also get access to the manufacturing facilities of Tiffany in addition to its 321 retail stores worldwide. Tiffany has 124 stores in America (93 in the United States), 47 stores in Europe, 145 stores in Asia Pacific and 5 in other markets. This implies a 16% addition in the number of retail stores in America for LVMH. If we go by the figures of 2018, this acquisition would result in an 8% increase in the revenue and 6.7% increase in the operating profit of LVMH. The contribution of the Watches and Jewellery segment of LVMH to the total revenue would increase from 8.7% to 16% and contribution to operating profit would increase from 7% to 13%.

LVMH has a market capitalization of USD 143 billion and the free cash flow was USD 5.34 billion in 2018- this acquisition is almost 3 times the free cash flow of the company in 2018. LVMH has maintained a low Debt to Equity ratio in the past and the Debt Service Coverage Ratio has been satisfactory. The company plans to finance this acquisition entirely through short term debt. LVMH will take USD 8.5 billion bridge loan, USD 5.75 billion commercial paper and USD 2.2 billion revolving credit. The acquisition of Tiffany will also add a debt of USD 1.85 billion to the books of LVMH. The Gross Debt to EBITDA ratio of LVMH will remain almost the same after the acquisition, if Tiffany continues to operate at the same pace after acquisition. However, the short-term debt and long-term debt on the books of the company is increasing every quarter. The debt to equity ratio of LVMH rose in June 2019. Moody’s has warned the company against more such leveraged acquisitions in future. As a result of this acquisition, LVMH expects its net income to increase by 5% in 2020.

One of the reasons Tiffany agreed to this deal could have been its slightly shrinking margins in the recent years as depicted above. The brand value of Tiffany has also gone down slightly in the recent years. It is believed that the company could not adapt completely to the changing tastes of the millennials. There have also been many changes at the executive level in Tiffany in the last 3 years. The company did not have a stable pool of employees in the senior management and executive level for the last few years leading to speculations over its stability. LVMH has a good record of driving the growth of brands even in jewellery and watches segment. LVMH had acquired the jewellery brand Bulgari in 2011 and the revenue from this brand is now twice that in 2011. With the help of this acquisition LVMH will be able to expand its reach both in the jewellery segment and in the United States. Both the companies have been operating in luxury segment and catering to high end customers. We believe there are synergies between the two companies for successful integration and smooth operations post-merger. Tiffany can get access to the supplier relationships of LVMH, its distribution network and its other strategic relationships and partnerships to strengthen its supply chain and operations through this acquisition. Tiffany will also get a more stable management after the merger. We expect this merger to be successful and the revenue and profit of the jewellery and watches segment of LVMH to increase after this merger.

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