As news leaked of LVMH CEO Bernard Arnault talking to advisors on possible avenues for re-negotiating the acquisition of Tiffany & Co, the group’s largest deal to date, rumours started to spread among industry commentators that LVMH might have been getting nervous of completing the deal amidst the retail carnage precipitated by the Covid pandemic.
In July, the United States announced that it would impose tariffs of 25% on French products, including makeup and handbags, as part of a dispute over taxing digital companies. Early Wednesday, the looming threat of US tariffs set to kick in on 1st January 2021 prompted the French government to call on LVMH to defer its takeover of Tiffany. The French luxury conglomerate announced that it would “not be able to complete” the $16.2 billion deal” because of “a succession of events which undermine the acquisition.”
“It’s a governmental order, we had no other choice but to honour the French government’s wishes.” – LVMH CFO Jean Jacques Guiony
The collection of the tariffs were meant to begin on January 6, 2021 and according to LVMH, the French government had “directed” the conglomerate to delay the acquisition beyond that date. LVMH CFO Jean Jacques Guiony added that the company had no plans to close the deal at a later date.
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In November 2019, LVMH, the owner of Louis Vuitton, had secured an agreement to purchase Tiffany but was expected to close the deal in 2020 pending regulatory approvals; the global pandemic outbreak had put a pause on international trade and economic activity as markets closed in self-imposed quarantine as part of containment measures to prevent a wider spread.
Though no further details were forthcoming, the luxury conglomerate had convened a board meeting ahead of the US jeweller’s quarterly results due out today on June 5, to study potential options to force a re-negotiation of the $16.2 billion deal, among one of the strategies was exploring whether Tiffany was in breach of its obligations under the merger agreement; however the famed American jewellery brand did not believe there is a legal basis to renegotiate. Sources familiar with the matter told Reuters that the company is in compliance with financial covenants under the merger agreement with LVMH, and expects to remain so after declaring a quarterly dividend two weeks ago.
LVMH said that they “notably focused its attention on the development of the pandemic and its potential impact on the results and perspectives of Tiffany & Co with respect to the agreement that links the two groups.”
Although no further details were offered by LVMH at the time, many believed that Arnault’s temperature on the deal turned cold after the outbreak of mass protests and rioting following the killing of African American George Floyd by police officers in Minneapolis added further uncertainty to an already weakened retail segment in the vital US market.
That month, Tiffany & Co had reported that same-store sales were down 44% in the fiscal first quarter of 2020, prompting some observers to suggest that Arnault, the billionaire CEO of LVMH was getting cold feet in the wake of the retail apocalypse. With revenue falling 45% to $555.5 million, a net loss of $64.6 million, or 53 cents a share, from earnings of $125 million in the same period last year ending April 2019; even CEO Alessandro Bogliolo’s assertion that “a robust recovery was underway” in China, was not indicative of how customers would respond in other countries.
“Increased sales in mainland China and global e-commerce accelerated during the second quarter and propelled our return to quarterly profitability,” – Tiffany & Co CEO Alessandro Bogliolo
As 24 August 2020 came and went, the first deadline to complete the acquisition under the terms of the deal, without further activity from LVMH, Tiffany exercised its option to push back the deadline as far as 24 November.
Thursday 27 August, a day after Reuters had reported that LVMH failed to close the acquisition of Tiffany, the American jeweller reported a stronger-than-expected quarterly profit and signalled an uptick in sales due to a recovery in China and online demand. Tiffany & Co reported that worldwide sales in August were slightly higher than a year earlier, as the rebound in second-quarter revenues in China extended into the current quarter.
Globally, Tiffany’s e-commerce business was up 123%, with key markets such as the United States and the United Kingdom up 122% and 93%, respectively, during the second quarter. For a moment, it looked like LVMH was getting good value even if the retail climate was not exactly ideal.
“We regret having to take this action but LVMH has left us no choice but to commence litigation to protect our company and our shareholders.” – Roger N Farah, the Tiffany chairman
After LVMH announced that it could not go ahead with the the acquisition because it had been undermined by a “succession of events”, Tiffany launched a lawsuit in the US to force LVMH to go ahead with the deal “on agreed terms” by the end of November.
Filed in the Court of Chancery of the State of Delaware, the lawsuit also makes clear that LVMH is in breach of its obligations relating to obtaining antitrust clearance. In addition, the Tiffany lawsuit refutes LVMH suggestions that it can avoid completing the acquisition by claiming Tiffany has undergone a Material Adverse Effect (“MAE”) or breached its obligations under the Merger Agreement, or that the transaction is in some way inconsistent with its patriotic duties as a French corporation.
Under the terms of the Merger Agreement, LVMH assumed all antitrust-clearance risk and all financial risk related to adverse industry trends or economic conditions. In addition, LVMH is required to do everything necessary to secure all required regulatory clearances as promptly as practicable.
Roger N Farah, Tiffany & Co chairman added, “Tiffany is confident it has complied with all of its obligations under the merger agreement and is committed to completing the transaction on the terms agreed to last year. Tiffany expects the same of LVMH.”
When the August 24, 2020 deadline arrived, LVMH had not filed for antitrust approval in three of the required jurisdictions, prompting Tiffany to extend the outside date to November 24, 2020. With the extended outside date now less than three months away, LVMH still has not filed formal requests for antitrust approval in the European Union or Taiwan, and applications are still outstanding in Japan and Mexico. The Tiffany & Co lawsuit claims that this is evidence of LVMH’s concerted efforts to delay or avoid receipt of regulatory approvals in those jurisdictions in breach of the Merger Agreement.
Currently, there is no basis under French law for the Foreign Affairs Minister to order a company to breach a valid and binding agreement.