Louis Vuitton Will Have to Pay Top Dollar for Tiffany

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(Bloomberg Opinion) -- Bernard Arnault knows you don’t get trophy assets at bargain prices. His luxury goods company LVMH Moet Hennessy Louis Vuitton SE will probably have to pay top dollar to win over shareholders in Tiffany & Co. after making a $14.5 billion proposal to buy the U.S. jeweler.

If a deal happens, LVMH investors will need to put faith in Arnault’s record of running his businesses well, and the idea that it’s worth preventing Tiffany falling into rival hands.

LVMH’s initial proposal, worth about $120 per Tiffany share according to Bloomberg News, should be easy for the American company to reject. The premium is just 22% above Tiffany’s market value on Friday — too mean for such a storied brand. True, the top-up is 35% higher than Tiffany’s three-month average share price. Even so, the stock was trading almost as high as the bid price in November last year, when Tiffany’s share price to earnings multiple was considerably higher.

Arnault’s financial capacity to sweeten the pitch is in no doubt. LVMH has a market value of 196 billion euros ($218 billion). Its debt relative to profit is expected to be negligible at the end of the year. Tiffany’s indebtedness is also relatively low. Buying Tiffany for cash at the mooted offer price would lift the enlarged group’s leverage to just over 1 times combined Ebitda base on current forecasts, hardly a stretch.

But if a higher offer is necessary to win over Tiffany’s board and investors, a big increase in the bid price wouldn’t be easy to justify without some confidence that LVMH can squeeze more out of Tiffany than the U.S. company is anticipated to achieve on its own. Tiffany’s shares have fallen for a reason: Revenue growth has ground to a halt this year. The jeweler is forecast to increase sales by 5% annually on average over the next four years, against 6% at LVMH (a far larger company).

Meanwhile, Tiffany is predicted to make $1.2 billion of operating profit in its 2024 fiscal year. Even at the opening bid price, that would imply a paltry mid-single digit return for LVMH on what would be a $15 billion outlay taking into account assumed net debt.

The French luxury giant needs to find a way of either boosting sales or margins to make a deal pay. But Tiffany would be a bigger mouthful than Arnault is used to digesting. It is in the middle of a reinvention under its current chief executive officer, Alessandro Bogliolo, and jewelry isn't LVMH’s traditional expertise.

So LVMH’s independent investors would have to place a lot of faith in Arnault replicating his past M&A and operational success. They’ve done well out of him recently: the company’s market value has doubled since early 2017. They’ll also have to judge whether they’d be happy to see Tiffany being snapped up by someone else, which would make LVMH’s position in luxury jewelry a little tougher. Tiffany will be expensive, but the cost of walking away might be too.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2019 Bloomberg L.P.

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