LVMH and Tiffany & Co.’s Messy Breakup
No breakfast at Tiffany’s here.
Divorce rates have spiked during the pandemic. And it seems the trend is spilling over into corporate marriages.
In November last year, LVMH got down on one knee and proposed to Tiffany & Co. The luxury goods giant announced it would be acquiring the American jeweller for $16 billion in the largest deal the industry had ever seen. The deal would pull Tiffany from its recent slump and expand LVMH’s 75-brand-strong portfolio. Unsurprisingly, Tiffany said yes.
A match made in corporate heaven, everyone thought. LVMH chairman Bernard Arnault, one of the richest men in the world, waxed lyrical at the time about his “immense respect” for Tiffany as a “globally recognized symbol of love.” So romantic. He quickly wrote his vows, promising to ensure the jeweller would “thrive for centuries to come.”
It’s now nine months later, and LVMH wants its ring back.
The First Blow: LVMH Wriggles Out
In May, reports swirled in the press that LVMH was looking to re-examine its deal with Tiffany due to the pandemic. So it came as no surprise when LVMH announced last week it couldn’t go ahead with the acquisition because of a “succession of events” that undermined the deal.
But, cautious not to blame the breakup entirely on coronavirus, LVMH pulled an unusual trump card. The luxury magnate said it had received a letter from the French government asking LVMH to delay the deal due to the US threat of trade tariffs on French products.
Some background if, like me, you’re not well-versed on tariff news: earlier this year, France implemented a controversial ‘tech tax’ on digital companies, hitting American tech giants like Google, Facebook and Amazon the hardest. The US, not one to back down from a fight, announced in July it would slap tariffs on 25% of French products.
“I am sure that you will understand the need to take part in our country’s efforts to defend its national interests,” foreign minister Jean-Yves Le Drian told Arnault.
Well, law trumps chivalry.
The letter, explained LVMH, is a “governmental order” that the company had “no other choice” but to honour. LVMH only let Tiffany representatives view a translated version of the letter for a few minutes, and forbade them from taking any pictures.
But, as with all messy breakups, secrets are slowly coming out of the woodworks. The French government’s request is a little too convenient for LVMH, who has spent months scratching its head looking for a way out of the deal. Speculation is rife that Arnault — nicknamed the ‘wolf in cashmere’ for his aggressive business tactics — may have asked the government for a helping hand in calling time on the acquisition.
Unsurprisingly, LVMH maintains its innocence. The New York Times reported LVMH’s chief financial officer “balked” at the accusations. “Are you seriously suggesting that we procured the letter?” he said. “It was fully unsolicited.”
This wouldn’t be the first time Arnault has been embroiled in luxury wars. In 2017, LVMH threatened to launch a sudden hostile takeover of Hermes — a brand that prides itself on its legacy of close-knit family control. Twenty years ago, Gucci made similar headlines for its struggle to escape a predatory takeover by Arnault.
Although neither takeovers were successful, they earned Arnault his reputation as a master strategist. The wolf in cashmere, it turns out, plays for the long-term.
The Second Blow: Tiffany Refuses Divorce
Forced into playing the role of the jilted ex, Tiffany marched immediately to Delaware courts to file a lawsuit against LVMH, launching a double-pronged attack.
The jeweller’s chairman, Roger Farah, said the letter from the French government doesn’t provide a legal basis for breaking a binding contract, and that LVMH’s failure to include Tiffany in its discussions with the government breached LVMH’s consulting obligations under the merger agreement. The fact no other French company received a similar letter urging it to “defend national interests”, says Farah, is evidence of LVMH’s “unclean hands” — a phrase any lawyer knows is a serious allegation.
Farah twisted the knife even further, accusing Arnauld in the same press release of dragging his feet throughout the acquisition process. According to Tiffany, LMVH failed to secure the required regulatory approvals from the EU, Taiwan, Japan and Mexico in the run-up to deal’s closing date.
Combined, Tiffany is convinced LVMH tried to use “any available means in an attempt to avoid closing the transaction on the agreed terms.” Basically — LVMH got cold feet and wanted out ASAP.
The Final Blow: LVMH Fights Back
If the situation wasn’t already dysfunctional enough, it is now.
Offended by Tiffany’s accusations, LVMH is preparing to wage a legal war of its own. The luxury goods giant released a statement on the 10th September saying Tiffany’s lawsuit “was clearly prepared a long time ago” and demonstrates “the dishonesty of Tiffany in its relations with LVMH.”
Oof.
After waving away the jeweller’s claims about delaying regulatory approvals, LVMH came to the table with accusations of its own. After pulling back the curtain on Tiffany’s finances during the pandemic, LVMH announced Tiffany’s performance in 2020 was “very disappointing, and significantly inferior to those of comparable brands” in the LVMH group.
Hitting the company where it hurts, LVMH said it would “challenge the handling of the COVID crisis by Tiffany’s management and its Board of Directors”, specifically the decision to distribute dividends at a time when Tiffany was making a loss.
Gunning for Tiffany’s management, however, is a predictable move. LVMH is trying to invoke the Material Adverse Effect (‘MAE’) clause in the merger agreement to justify leaving Tiffany at the alter.
An MAE clause says if there is a significant change in circumstances that reduces the value of the target company, the buyer may be allowed to terminate the proposed transaction.
Tiffany’s worldwide sales fell 29 per cent in the quarter ending July 31. If LVMH can prove this lacklustre financial performance constitutes a significant change in circumstances and reduces the company’s value, it can walk away from the deal with next to no repercussions.
So Who’s Going to Win?
Long story short — no one knows.
A similar breakup played out between Sycamore Partners and Victoria Secret in May. The former wanted out of its deal to buy a 55 percent stake in the lingerie brand and thought the agreement’s MAE clause was its golden getaway car.
Sycamore argued the agreement required Victoria Secret to operate in the ordinary course of business, and that it had fallen short of this by closing stores, furloughing workers and skipping rent payments.
In response Victoria Secret’s parent company, L Brands, went for the jugular. It pointed out COVID-19 was already in existence at the time of the acquisition agreement. So, as a precautionary measure, both parties had already agreed pandemic-related activities would not give effect to the MAE clause.
With relations soured and thoughts of using an MAE clause discarded, Sycamore and Victoria Secret agreed to a “mutual termination” of the acquisition.
Although interesting, the case doesn’t give us any hints about which way the Delaware court will swing its gavel between LVMH and Tiffany. Coronavirus didn’t exist when the acquisition was announced, so whether the MAE clause is in effect here is anyone’s guess.
The outcome of the luxury squabble will be an important step forward in figuring out whether a public health crisis is grounds to walk away scratch-free from an agreement.
But, like every corporate case, the most likely scenario doesn’t involve a judgement at all.
LVMH and Tiffany might go from warring partners to amicable exes, agreeing to mutually terminate the deal Sycamore-Victoria Secret style. This would mean Tiffany would be left alone to seduce another buyer at a time of significant uncertainty.
Or LVMH could use the legal battle as an excuse to drive down the $16 billion acquisition price. Given Arnault’s penchant for long-term strategies, I wouldn’t be surprised if LVMH puts a (much cheaper) ring on Tiffany later this year.
Regardless of the outcome, the French government’s involvement via letter is unprecedented and has elevated what would be a standard corporate dispute to a matter of geopolitical interest.
As a certain Princess once said, a marriage can get crowded when there are three people in it. Especially when the third person is the government.
