Tiffany & Co. Is a Symbol of Luxury—but LVMH May Manage to Buy It for a Bargain

October 30, 2019, 9:20 PM UTC

LVMH CEO Bernard Arnault, who built the world’s third-largest fortune with a series of auspicious deals, has positioned his firm to buy Tiffany & Co. for a song. And given his past record for sharpening luxury brands, he may be the last person to get a bargain at the storied jewelry retailer.

The French multibillionaire behind the luxury fashion juggernaut has timed his move well, tempting Tiffany’s shareholders with a decent offer of cash now, rather than the larger payout that might conceivably await them a year or two down the line when Chief Executive Officer Alessandro Bogliolo’s overhaul starts to pay off.

The offer—$120 a share, valuing Tiffany at $14.5 billion—comes as a powerful, if perhaps temporary, combination of headwinds is holding sales and profit growth back at the New York-based jeweler.

First and foremost, Tiffany is still in the investment phase of a major revamp under Bogliolo that has won plaudits from analysts but requires some heavy up-front spending, most notably in the estimated $250 million, three-year refurb of the flagship store on 5th Avenue in New York.

Tiffany & Co. Flagship Store Ahead Of Earnings
Tiffany & Co.’s turnaround involved a multimillion-dollar renovation of its flagship store Fifth Avenue in New York. (Victor J. Blue/Bloomberg via Getty Images)
Victor J. Blue/Bloomberg via Getty Images

Bogliolo needs time as well as money. Aiming to secure a new generation of customers for a brand that has arguably relied too much on past glories, he’s trying to reposition Tiffany in the public mind, away from formality and towards a more pragmatic—but still high-end—conception of ‘everyday luxury’ embodied by the Paper Flowers collection by Reed Krakoff, the company’s artistic director since 2017.

But since there’s a limit to how much marketing normal people can absorb, Bogliolo told investors in June it will be at least another 18 months before Tiffany can “properly refresh (the) product assortment with enough newness to generate balanced and sustainable growth across our entire product portfolio.”

Headwinds from the East

That, at least, is within Bogliolo’s control. Other stuff isn’t, such as the months of unrest that have hit sales in Hong Kong, its fourth-biggest market. What’s more, Chinese tariffs—countermeasures against President Donald Trump’s—threaten to make Tiffany uncompetitive with European rivals in its biggest growth market. Chief Financial Officer Mark Erceg told investors in the summer that the company has had to “eat” the latest Chinese tariff hike to avoid putting itself at a price disadvantage against the likes of Richemont’s Cartier and LVMH’s Bulgari. 

All that is deeply inconvenient, given that Bogliolo gambled on throwing much of the investment budget at China last year, and it will make it harder for the company to get its planned returns on fancy new stores in Beijing, Shanghai, and Hong Kong.

Tiffany’s stock price had lost over 40% at the end of last year as the trade war escalated, and it has languished since then. Before LVMH’s approach, the stock had gained only 10% year-to-date, compared to nearly 20% for the S&P 500.

That presented the opportunity to Arnault and LVMH. The offer in mid-October, while a 33% premium to Tiffany’s prevailing level at the time, was still well below last year’s all-time high of $141.62, posted when the jeweler’s investors were enthusiastically buying into Bogliolo’s ideas.

Advantages for Arnault

The deal would be LVMH’s biggest ever but, with its market capitalization of $212 billion, easily digestible, analysts say. Jefferies analysts Flavio Cereda and Kathryn Parker wrote in a note to clients that it would “potentially double the size and profitability” of LVMH’s ‘Hard Luxury’ division that is both smaller and slower-growing than its barnstorming leather goods business or its high-margin wines and spirits division. 

FRANCE-ECONOMY-BUSINESS-LUXURY-LVMH-RESULTS
LVMH’s Bernard Arnault is looking to snag Tiffany for $120 per share, well below the $141.62 it was trading at last year. (Eric Piermont/AFP/Getty Images)
ERIC PIERMONT/AFP/Getty Images

For Arnault, it would also have the advantage of making LVMH a big employer in the U.S., a status that may just help keep its Veuve Cliquot and Chateau d’Yquem off any list of targeted products should President Trump decide to open a new front in his trade wars with Europe. Trump, along with his daughter Ivanka and son-in-law Jared Kushner, were prominent guests at the opening of a new leather goods workshop in Alvarado, Texas, earlier this month, around the time Arnault was making his offer.

Jeffries’ Cereda and Parker also flagged parallels with what was previously LVMH’s biggest deal in jewelry back in 2011, when it bought Bulgari.  Bogliolo was chief operating officer of Bulgari at the time. Francesco Trapani, then CEO of Bulgari, is now a director and a significant shareholder in Tiffany.

“Alessandro Bogliolo’s involvement is—from my perspective—an accelerator to a deal happening,” said Chris Donnelly, founder and CEO of Verb Brands, a digital marketing agency based in London. “He knows the game and understands the art of the deal.”

“He knows from the inside out that one of LVMH’s strengths is nurturing and growing heritage brands as modern luxury brands,” said Rebecca Robins, global head of luxury at the consultancy Interbrand.

As such, the reasons to recommend LVMH’s offer are clear enough. And with no controlling shareholder to veto a sale, and little hope for a quick juicing of sales and profits in the short term, Bogliolo appears to have few alternatives.

Bigger bids?

Tiffany’s board said on Monday that it would, out of fiduciary duty, consider the offer—a statement that some interpreted as stalling for time to see if a higher bid can be found somewhere else. (Tiffany declined to comment any further on its statement.) Gucci owner Kering is one possible candidate, given that Tiffany would strengthen its business in North America, where it only generates 16% of its sales. Failing that, the world is full of well-funded private equity companies that might be more inclined than public markets to let Bogliolo play his long game.

But a company that will probably not be tempted, says Interbrand’s Robins, is an LVMH arch rival: Compagnie Financiere de Richemont, the owner of Cartier, Montblanc and Piaget.

A bid from the Swiss luxury group is “unlikely,” said Robins, since it’s looking to diversity its portfolio elsewhere. Just last week, Richemont teamed up with Israeli fashion designer Alber Elbaz for a project “developing solutions for women of our times.” 

However good those “solutions” may be, it’s hard to see them hurting LVMH as much as a reinvigorated Tiffany could hurt Richemont.

More must-read stories from Fortune:

Brexit is being delayed yet again. So what happens now?
—Young professionals are buying fixer-uppers in Europe for one euro and starting over
—Norway is a green leader. It’s also drilling more oil wells than ever
A.I. regulation is coming soon. Here’s what the future may hold
Offshore wind power’s time has finally come, IEA says
Catch up with Data Sheet, Fortune’s daily digest on the business of tech