September 30, 2020

Breakingviews: Tiffany looks ill suited for life on the shelf

by Breakingviews.

LVMH’s once hot pursuit of Tiffany has descended into acrimony. That’s unfortunate, because the U.S. jeweler doesn’t look well suited to life alone. If the $16 billion deal craters, Tiffany could be worth almost a third less than its closing value on Monday.

The French conglomerate led by boss Bernard Arnault has filed a lawsuit saying Tiffany has bungled its response to the coronavirus pandemic, and claiming the right to walk. LVMH suggests that Tiffany’s future looks “dismal.” Tiffany, of course, disagrees – and the jeweler filed its own lawsuit against Arnault’s empire earlier in September, accusing it of dragging its feet over the all-cash deal.

Entertaining as all this is, the real question is what Tiffany is worth if LVMH gets away. Richemont is a natural comparison. The Swiss owner of Cartier and Van Cleef & Arpels peddles jewelry to the super-wealthy too. But its watch division is struggling, and thus Richemont is valued at a discount to its peers, Hermes International and Kering, at about 12 times the next 12 months’ forecast EBITDA, according to Refinitiv. On that same multiple, Tiffany would be worth around $12 billion.

But Tiffany isn’t quite a Richemont. For one, it’s half the size and is less diversified. It’s also more American. More than 40% of Tiffany’s sales come from the Americas, compared with one-fifth of Richemont’s. Conversely, Richemont is more exposed to Asia, which is faster growing and seems to be emerging from Covid-19 more quickly, than the United States.

In its reliance on America, Tiffany resembles another iconic homegrown brand, Ralph Lauren. The $5 billion clothier trades at about 7 times EBITDA. True, Tiffany is higher-end, and less driven by frivolous fashions. But pitched somewhere south of Richemont and a fair way north of Ralph Lauren, Tiffany ought to be worth perhaps 10 times EBITDA or roughly $10 billion – compared with its current market capitalization of $14 billion.

Why would Arnault ever have offered so much more? Perhaps because with an LVMH-style makeover, Tiffany’s brand could still sparkle. A recent UBS survey found that luxury buyers in China see Tiffany as a go-to jewelry brand second only to Cartier. It’s just that realizing Tiffany’s potential, and redesigning its global footprint, would take considerable work. With so much ill will, that proposition must be rapidly losing its appeal.

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