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LVMH’s $16 Billion Tiffany Takeover ‘A Smart Move’: Street Wrap

Published 11/25/2019, 04:40 AM
Updated 11/25/2019, 06:30 AM
© Reuters.  LVMH’s $16 Billion Tiffany Takeover ‘A Smart Move’: Street Wrap

(Bloomberg) -- LVMH's (PA:LVMH) $16 billion purchase of U.S. jeweler Tiffany (NYSE:TIF) won the applause of analysts and investors, who said the deal allows the French conglomerate to bulk up in jewelry, threatening the dominance in the field of Cartier owner Richemont (SIX:CFR).

“It’s a smart move” that will help LVMH “launch a more concerted attack on the Asian millennial market,” Flavio Cereda, analyst at Jefferies International Ltd., wrote in a note. The deal also will likely lead to renewed speculation about other potential tie-ups among luxury players, including Richemont, privately held Chanel and Gucci-owner Kering (PA:PRTP) SA, Cereda wrote.

LVMH shares, which jumped to a record earlier this month, advanced as much as 2% in Paris and were the No. 2 gainer on France’s CAC 40 Index. The troubled Italian shoemaker Tod’s SpA (MI:TOD), often touted as a potential takeover target, climbed as much as 2% in Milan.

Relief over Sunday’s peaceful elections in Hong Kong and optimism about progress in China-U.S. trade talks also gave a boost to Europe’s luxury stocks on Monday.

Here’s what else analysts are saying about the LVMH-Tiffany deal:

Bryan Garnier, Loic Morvan (Buy on LVMH)

  • The deal should have a slightly enhancing impact on LVMH’s 2020 EPS (2.5%) and give a net debt/Ebitda ratio close to 0.9x by the end of 2020
  • Acquisition will give LVMH a 20% share of the global jewelry market, “very close” to Richemont
  • U.S. weighting in LVMH sales will increase to 26% from 23% given the U.S. weight in Tiffany’s sales (44%)
Jefferies, Flavio Cereda (Hold on LVMH)

  • LVMH is the obvious acquirer for Tiffany, not only because of its deep pockets and annual EU5b in free cash flow generation, but also its status as a conglomerate and its need to bulk up its offering in hard luxury, which has grown organically since the 2011 purchase of Bulgari
  • Without Tiffany, hard luxury would account for 9% of LVMH sales and 6% of Ebit in 2020; Tiffany would lift this to 15% and 11%, respectively -- so “still dwarfed” by soft luxury (42% and 66%), but attaining a “rather more relevant” role
  • Deal is a positive for LVMH as there are limited M+A opportunities of size in luxury generally; barring Rolex or Patek Philippe there are no others in hard luxury, the category LVMH needed to bulk up in
  • By contrast, it’s a negative for Richemont given that Tiffany allows LVMH to become a “far more credible competitor on its home turf, and one with deeper pockets and greater clout”
RBC Europe, Rogerio Fujimori (Outperform on LVMH)

  • Sweetening the acquisition price to $135/share will require a bit more work from LVMH and a bit more time to generate a return on price paid in excess of the group’s weighted average cost of capital (WACC) given multiples paid for Tiffany (3.7x sales, 16x Ebitda and 21x Ebit based on consensus estimates for fiscal year ending Jan. 2020)
    • LVMH can still generate long-term value if it manages to reinvigorate Tiffany’s top-line story and improve profitability in the long term
  • Tiffany will probably require stronger initial reinvestment than Bulgari to reignite top-line growth, but should immediately benefit from back-office and distribution synergies as part of LVMH as well as the ability to explore faster the opportunities created by digital
  • RBC sees nearly 5% EPS accretion from deal in year 1 due to Tiffany’s profitable business model and LVMH’s low cost of debt in current ultra-low interest-rate environment
    • Even with the additional debt to buy Tiffany, LVMH’s balance sheet will remain strong
LVMH Tiffany Tie-Up to Leader, Not All Bad for Richemont: BI React

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