Tiffany (NYSE:TIF) is an American luxury jewelry and specialty retailer, specifically known for its diamond and sterling silver jewelry. It received an unsolicited bid of $14.5 billion ($120/share) from the biggest luxury group, LVMH (EPA: MC) in October 2019. The offer was a 30% premium to the market price but the U.S. jeweler believed it was undervaluing the company. LVMH improved the offer to $135 per share, now valuing Tiffany at $16.6 billion.
Tiffany’s board couldn’t reject the offer which was a huge premium to the price ($98.55) before any news of a potential deal broke. 99% of the company is owned by institutional investors like asset managers, hedge funds and pension funds and the remaining 1% is owned by strategic investors or management, making them less important in the decision-making process.
Tiffany has been suffering lower sales & earnings growth across all regions since 2014 as the dollar appreciated against the euro & yen, making it less attractive for foreign visitors and expensive in other countries. In July 2018, The Bulgari veteran Alessandro Bogliolo took over as CEO and it was hoped that he could turn around the sales, capturing a younger audience. Although we did see higher sales growth, operating margins contracted from 19% to 17% from FY18 to 19.
There was a time when Tiffany could charge an extra 20% to their customers as compared to their peers because of its brand image and popularity. This was something really attractive to the investors as it portrayed Tiffany as a market leader in the jewelry industry.
The deteriorating fundamentals and slower growth rates after 2014 forced the management to strategize differently and participate more in the affordable segment. According to 2018 annual reports, roughly 40% of revenue was earned from their affordable jewelry segment with a price of less than $250.
Under LVMH, Tiffany will be successfully able to tackle this problem as Mr. Bernard has a history of turning big brands around. Bulgari, a high-end luxury retailer of jewelry was acquired by LVMH in 2012. Bulgari’s sales are doubled and profits are fivefold after its acquisition. Analysts at RBC estimated that significant synergies could be realized through the deal, which could lift Tiffany’s operating margin. LVMH currently generates $4.2 billion in free cash flow, which gives it a massive potential to invest and reposition the brand taking it more upmarket in the U.S. and target a millennial market in Asia as young Chinese consumers are fueling the growth across luxury goods in that region. Tiffany’s acquisition by a French brand will only improve its brand image as it is already diversified across different geographies and so is LVMH.
MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in Tiffany & Co. Read our full disclosure policy here.
Contributing Writer at MyWallSt
This article was written by one of our MyWallSt contributing writers.