Tiffany And LVMH – There Will Be No Blue Box

Luxury goods giant LVMH Moët Hennessy Louis Vuitton LVMUY won't be going through with its takeover of Tiffany & Co. TIF for $14.5 billion. The conglomerate blamed the French government for requesting a delay beyond January due to the potential threat of U.S. tariffs on French goods.

The Paris-based conglomerate said the French government wanted to assess the impact of these tariffs and The Wall Street Journal reported that the $16.2 billion deal that was scheduled to close Nov. 24 will be canceled due to Tiffany's poor handling of the pandemic. In turn, Tiffany sued the luxury giant in an effort to enforce the acquisition, saying LVMH had breached its merger obligations by excluding the retailer from its discussions with the French government. The New York jeweler said LVMH's argument has no basis in French law and blamed the conglomerate for not seeking antitrust approval from EU jurisdictions.

It was expected for the deal's value to be under strain due to a pandemic that wrought havoc to global retail. As a consequence, Tiffany's share price has been trading quite below the $135 per share price that LVMH had agreed to pay last November.

A Match Made In Heaven, But A Pre-Pandemic Heaven

Before the pandemic, the deal made sense. Tiffany had been trying to transform its brand to appeal to younger and digital-savvy buyers and could have used a rich owner to increase its footprints. LVMH had thought the deal would strengthen its position in high-end jewelry as well as the U.S. market. With joined forces, they were supposed to grab a share of China's luxury market. It seemed like a match made in heaven. But then COVID-19 struck and threw all those assumptions overboard.

Pandemic Changed The Landscape Of Retail

LVMH said second-quarter sales fell 38 percent to $9.2 billion. This is even worse than the 17 percent decline in the first quarter. Tiffany's global net sales fell 29 percent in the quarter that ended July 31, but this was quite an improvement from the prior 45 percent drop. Increased sales in mainland China and global e-commerce efforts had accelerated a return to quarterly profitability. But despite these better-than-expected results, it seems the iconic US jeweler lost its appeal for LVMH.

US-France Tension

Last year, France sought to impose a tax on global tech giants including Alphabet Inc GOOG, Amazon.com, Inc. AMZN and Facebook, Inc. FB. The French tech tax is aimed at "establishing tax justice" by having digital companies to pay their fair share of taxes in countries where they make money instead of using tax havens.

In response to the tech tax, the U.S. threatened to slap 100% tariffs on $2.4 billion of French products. Now, there is a temporary but tense truce between the two countries as France decided to postpone the implementation of the digital tax to December. In other words, it parked the issue until after the next U.S. presidential election.

Outlook

The transaction was set to be the largest ever in the luxury sector. But just like in an actual marriage, one party pulled out. These things happen. It happened in May when the sale of the lingerie brand Victoria's Secret to the private equity firm Sycamore Partners fell apart. Now, did the LVMH solicit help from the French government to exit the deal – who knows? The bottom line is it doesn't matter as the deal is off.

A Far Less Certain Future

Besides this expensive legal battle, Tiffany has several concerns. Even if the deal comes through, it will most likely be at a discounted price. However, if it stays single, Tiffany will again be looking for a buyer in a much less certain world. It was already struggling to appeal to new generations that no longer find ‘diamonds are a girl's best friend.'

As for tariffs, this uncertainty is only further complicating things, but it remains unclear what the exact impact to LVMH would be and whether the tariffs in question will even go into effect. All we know is that the pandemic wrought havoc across the global luxury market. Boston Consulting Group estimated that sales are set to contract 25 to 45 percent in 2020, with a slow recovery that could take up to three years. This is the biggest concern: is the worse behind us, how long will this uncertainty last and how quickly can the global economic rebound. Moreover, is it even possible to return to normal that we had before the pandemic or is the world in for an entirely new definition of normal?

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