August 28, 2020

Breakingviews: Tiffany’s business loses even if shareholders win

by Breakingviews.

Tiffany is no longer worth the $16 billion LVMH offered to pay for it last November. Nonetheless the U.S. jeweler’s board seems bent on forcing French billionaire Bernard Arnault to keep his word, and thinks it has the law on its side. If it wins the day, shareholder value will have prevailed – but an American icon could end up permanently tarnished.

The 29% slump in sales in the May-to-July period from a year earlier that Tiffany reported on Thursday isn’t that bad. LVMH’s own watches and jewelry sales halved in its own latest quarter to June 30. But bigger shifts are afoot that are eroding both companies’ value. China’s nouveaux riches are buying far more luxury goods in China rather than abroad. And customers everywhere are purchasing more online. Tiffany now makes 15% of its sales online, compared with 6% last year. Strip that out, and sales in actual stores fell 36%. Luxury firms with bricks and mortar in countries like the United States have their assets in the wrong place.

Accepting a lower price from Arnault’s LVMH might be logical, but that’s not how U.S. shareholder capitalism works. Tiffany’s board is, essentially, required to push for the highest price. Covid-19 wasn’t an issue in November, but filings detailing the merger agreement say the buyer can’t pull the plug because of developments that affect Tiffany’s whole industry. And arguing that point in court could prove costly if LVMH loses. Tiffany’s pre-deal market value was around $6 billion less than what LVMH promised to pay.

So what if Tiffany stands diamond-firm? Shareholders might win their $16 billion cash payout. But the business itself would almost certainly end up worse off. Analysts expect Tiffany to make just under $550 million of operating profit in the year to January 2022, according to Refinitiv. Tax that at 30%, and it suggests a derisory return on LVMH’s all-in investment of 2%.

Arnault would have good reason to gut the company, shutter its U.S. stores and shift manufacturing – most of which is in Kentucky, Rhode Island and New York – elsewhere. That’s not the board’s problem, and it’s not shareholders’ either, but for Tiffany’s employees and business as a whole, it would be anything but a triumph.

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