LVMH is dazzled by Tiffany, but counter bids may be on the way

Like expensive gems, luxury goods companies have scarcity value. If Bernard Arnault’s LVMH Moët Hennessy Louis Vuitton is allowed to get its hands on Tiffany & Co, the American jeweller is unlikely to come up for sale again. That’s something LVMH’s biggest rivals, Kering and Cie Financière Richemont, might want to consider carefully.

Financially they could both afford to make counter bids for Tiffany. An offer from either Cartier-owning Richemont or Gucci-owning Kering at the $120 per share price proposed by Arnault would lift their net debt to about 2.5 times earnings before interest, tax, depreciation and amortisation (ebitda). That’s not too much of a stretch. Kering also has a 15.7% stake in sportswear maker Puma, worth about $1.8bn (about R26bn), which it could re-use on something more promising.

Both companies are no doubt extremely wary of taking on someone with such deep (and well-tailored) pockets as Arnault, but it’s a hard fight to sit out. Of the two, Richemont has most to lose from an LVMH-Tiffany tie up. The combined Franco-American group would take the Swiss giant’s position as the global leader in luxury jewellery, according to Bloomberg Intelligence.

Arnault has a track record of turbocharging the brands he adds to his stable. Take the jeweller Bulgari, which has more than doubled its revenue since being bought by LVMH in 2011, according to analysts at Royal Bank of Canada. If LVMH repeated that trick with Tiffany, it would seriously challenge Richemont’s flagship Cartier brand.

It would be a leap for Richemont to take on a lot more debt, especially when it’s still integrating the acquisition of online retailer Yoox Net-a-Porter and is developing a web joint venture with Alibaba Group Holdings. But these distractions might explain Arnault’s tactics in striking now for Tiffany.

As for François-Henri Pinault’s Kering, it has lived with higher leverage in the past, although it tried to stick within a range of one to two times ebitda. It certainly has room to expand in jewellery. Along with watches, the category accounted for just 6.8% of its sales in 2018. But many of Tiffany’s products are in the so-called “accessible” luxury segment (sometimes priced at about $1,000 or less), which Kering has been moving away from.

The French group got rid of most of its stake in Puma last year to focus on the high-end stuff.

Another problem for both rivals is that any counter bid would have to be above the $120 per share on the table, and would probably provoke a response from Arnault. The final purchase price would be even more of a stretch. LVMH has a “balance sheet war chest” of more than $20bn, according to Deborah Aitken of Bloomberg Intelligence.

Of course, a competing bid could be funded partly with shares, but Tiffany might well prefer cash.

If Richemont and Kering can’t be enticed, the American company will have to persuade LVMH that it’s worth more without the help of an interloper bidding up the price. With its sales going in the wrong direction, that looks difficult. But auction or not, it’s Tiffany’s job to make Arnault pay up.

• Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries.

Bloomberg