Picture: BLOOMBERG/AKOS STILLER
Picture: BLOOMBERG/AKOS STILLER

Paris — LVMH, the French luxury giant that agreed in November to acquire Tiffany for $135 a share, is considering buying the jeweller’s stock for less on the open market amid a coronavirus-driven slump, people familiar with the matter said.

LVMH has discussed the idea with Tiffany’s board, which could grant permission for the potential purchases to go ahead after earnings, said the people, who asked not to be identified as the discussions are private. The French group hasn’t made a final decision on whether to proceed with selective market buying and is discussing possible legal hurdles to the idea, another person said.

Bernard Arnault. Picture: REUTERS/STEPHANE MAHE
Bernard Arnault. Picture: REUTERS/STEPHANE MAHE

The unusual step, which could allow the Paris-based group to capture a near 13% discount at recent prices, is an example of how companies are addressing the market rout caused by economic fears around the coronavirus. The move would also underscore LVMH CEO Bernard Arnault’s commitment to the deal.

“The actions LVMH takes are motivated by strategy and a long-term view,” Francesca Di Pasquantonio, an analyst at Deutsche Bank, said by phone. “It took them a long time to find the right moment for this deal.”

Shares of Tiffany traded at about $118 apiece before Bloomberg News reported the plans. They rose to $126 at the close on Thursday in New York, valuing the company at about $15bn. LVMH shares were up 8.3% at 1.19pm on Friday in Paris.

New York-based Tiffany said it would temporarily close all its stores in the US and Canada, as well as “many other locations”. The company reported results early on Friday, saying net income fell 8% in 2019. Comparable sales, a key metric for retailers, rose 3% on a constant currency basis.

A representative for LVMH declined to comment. Representatives for Tiffany didn’t immediately respond to requests for comment.

Risk arbitrage funds

Deal spreads, the difference in the price at which a company has agreed to sell its shares and the current value of that stock, reflect the market’s confidence that a transaction can overcome regulatory, financing or other, less predictable, hurdles to close. Most spreads on pending deals have widened dramatically in the past two weeks as nervous investors reassess even mergers that look likely to close.

The spread on Tiffany increased from just 64 US cents on February 13 to about $17 at one point Thursday. That means a trader buying Tiffany stock stood to make that $17 on every share they purchase if LVMH completes the transaction. In buying the shares itself, LVMH effectively saves that same amount.

While the sudden widening of apparently safe spreads reflects the general anxiety gripping the market, it also highlights the pressures facing so-called risk arbitrage hedge funds, which specialise in investing in mergers and acquisitions.

In the past few years quantitative hedge funds willing to invest in already tight deal spreads, using high amounts of leverage to boost returns, have blossomed. The rapid reversal of confidence caused by the current crisis has left several facing margin calls and liquidations, according to people familiar with the matter, adding to the widening.

Growing market share

A Bloomberg index of luxury goods companies has fallen nearly a third since the start of 2020 as the spreading coronavirus pandemic hampers demand for high-end products. Richemont, owner of Cartier and Van Cleef & Arpels, is trading near its lowest level since 2012.

During previous downturns, LVMH has reinforced its edge on competitors by continuing to invest in increasing — or at least preserving — its share of the market for top-end goods. So even as markets tumble, the logic behind the world’s biggest luxury goods maker nabbing one of jewellery segment’s most recognisable brands remains intact.

High barriers to entry would make it difficult for LVMH to gain market share in the “hard luxury” category — which includes jewellery and watches — without the Tiffany acquisition, Cowen  analysts including Oliver Chen wrote in a report on Thursday.

“We do believe both companies are committed to the deal,” Chen wrote. “LVMH has likely looked at, considered, and wanted this asset for several years.”

Bloomberg

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