TheChek News Flow

Deal for the US jeweller was signed in November before Covid-19 hit luxury demand

LVMH has said it does not plan to buy shares in Tiffany on the open market, in effect ruling out one way it could seek to lower the $16.2bn price it agreed to pay for the US-based jeweller before the Covid-19 pandemic. 

In a statement on Thursday, the conglomerate led by Bernard Arnault, the world’s third-richest man, did not address whether it was seeking to renegotiate the acquisition signed in November to reflect lower growth prospects for luxury goods amid a deep economic slowdown. 

This week, Reuters reported LVMH was “exploring ways to reopen negotiations” with Tiffany, while Women’s Wear Daily said that LVMH directors “sent a clear message that the acquisition should be reconsidered” at a recent board meeting. 

Tiffany shares have sold off by about 10 per cent since the reports to close at $114.24 on Wednesday in New York. LVMH has agreed to pay $135 per share in Tiffany.

In response to the reports, LVMH acknowledged that its board met on Tuesday and discussed the “development of the pandemic and its potential impact on the results and perspectives of Tiffany & Co with respect to the agreement that links the two groups”.

People familiar with the deal said it would be very difficult for LVMH to renegotiate the price or terms given the legal contract underpinning the acquisition. The merger agreement does include a termination clause under which either LVMH or Tiffany could walk away if they paid the other a $575m break-up fee. 

People close to Tiffany said that there had been no requests from LVMH to renegotiate the deal.

They added that it was understandable that LVMH would like to pay less for the asset given the short-term impact the pandemic had on Tiffany’s businesses, but they were confident the agreement is air tight. 

A person close to LVMH said that it had informally looked at options to revise the deal but nothing has come of it to date. The person added that one of the main reasons LVMH acquired Tiffany was its growth potential in China and Asia’s largest economy is further ahead in the process of reopening, which should bode well for the US jeweller.

LVMH’s controlling shareholder Mr Arnault built his empire over decades of acquisitions, often using bare-knuckle and hostile tactics, earning him the nickname the “the wolf in cashmere”. The deal for Tiffany is his largest to date and involves a US-listed company, unlike many of LVMH’s previous deals.

“Mr Arnault likes to play hardball and is a phenomenal dealmaker, but I don’t know that it’s possible for them to negotiate the deal given that they’ve signed a contract,” said Luca Solca, a luxury goods analyst at Bernstein Research.

“The deal for Tiffany still makes a lot of strategic sense despite Covid-19, so for LVMH there would be much more to lose than gain by derailing it.”

WWD reported that there were concerns among LVMH board members “about Tiffany’s ability to cover all its debt covenants at the end of the transaction”. This would be significant because if Tiffany missed a debt payment, it would potentially open up the merger contract to renegotiation.

But people close to the deal said such a scenario was unlikely given that Tiffany announced on May 20 that it would pay its quarterly dividend of $0.58 per share as planned. The board would not have made the payout if the company was in financial stress, they added.

Measures that bash Beijing may be challenged by many member states

Hello from Brussels, where we’ve just been told that bars and restaurants can open from next week and life is edging back to normal. That’s the good news, assuming no second wave of infection. The less good news is that Prince Joachim of the Belgian royal family has very definitely let the side down by swanning off to Spain for a party in the middle of the pandemic and getting infected with Covid-19. We at Trade Secrets feel this disappointment as keenly as anyone: Princess Astrid, Joachim’s mother (and sister to the current King Philippe) has several times acted as the royal family’s official trade envoy. This is not the image that trade needs.

This week’s main piece is on how the EU wants to equip itself with competition as well as trade tools to deter predatory Chinese companies, and Tall Tales is on the latest bad Brexit idea — another one! — to have gained currency in Boris Johnson’s government. Charted Waters looks at economists’ predictions for a no-deal Brexit.

So, who in Europe wants to take on China? We mean on the trade front, obviously: the EU’s response to the Hong Kong situation is about as feeble as you’d expect from a bloc that, when all’s said and done, doesn’t really have a foreign policy (feel free to tweet and tell us why we’re wrong, though we’ll take a lot of convincing).

Like many of its trading partners, the EU regards China as not just your typical low-cost exporter but a multi-headed hydra of trade-distorting behaviour. Aside from dumping allegedly underpriced goods on EU markets, its government-subsidised companies use their supposed unfair advantage to snaffle European public procurement contracts and take over EU companies, including those that might be strategically sensitive. Also Huawei and 5G and spying and all that.

A few years ago, when China was regarded as mainly a trading partner and not yet a strategic competitor, there was an instinct in some parts of the Brussels machine to evade the responsibility of dealing with it. The competition directorate (DG Comp) said unfair Chinese corporate activity was basically a trade issue that could be dealt with by antidumping, antisubsidy and public procurement measures, and chucked the ball over the fence to DG Trade.

And then the feeling towards China in EU policy circles — including, importantly, in Germany — shifted towards the sceptical. Suddenly, the unwelcome task of confronting Beijing became a prize possession. DG Trade dusted off an old idea of an “international procurement instrument”, which could apply penalties to subsidised foreign companies bidding for tenders. It reformulated its trade defence measures to allow a more eclectic range of data when constructing an antidumping case against China and thoughtfully put together a “grievance handbook” of distortions in the Chinese economy to help complainants make their case. And it has urged member states to set up foreign direct investment (FDI) screening measures to protect strategically sensitive sectors.

Now the commission’s competition people, no longer standing sniffily on the sidelines, are enthusiastically joining in the China-bashing action by asking for the power to review and possibly block takeovers from state-subsidised foreign companies. Existing disciplines are nothing like strong enough: current EU state aid rules are designed to prevent subsidy battles between member states, not between rival companies backed by EU and foreign governments.

Because competition is a centralised EU competency, these takeover measures ought to give the commission quite a lot of freedom to block state-subsidised marauders. However, it’s still going to suffer to some extent from the problem that all these tools do: a lack of enthusiasm among many member states for beating up Beijing. Competition is a technical legal process, but when it is big enough it also becomes political.

China has long had a good base of support in central and eastern Europe among countries keen for FDI. It earned more fans in Portugal and Greece for its investments during the eurozone sovereign debt crisis, and latterly in Italy. Its face mask airlift diplomacy during the Covid-19 crisis hasn’t done any damage either.

If the EU tries somehow to align all the antisubsidy tools it has within both the trade and competition competencies, it will surely have to make some kind of wider public interest determination akin to the traditional “community interest” test for antidumping. A takeover by a subsidised Chinese company might be permitted if it led to efficiency gains and moved production to the EU, for example. These are delicate and politically charged questions. It seems likely the member states will want to retain a big say. And many will instinctively side with China.

One other thing: the EU is trying to push ahead with a bilateral investment with China that is supposed to be completed this year. It’s awkward timing at the same time to be taking on new powers to block foreign investments. We have a feeling this takeover idea is going to be thrashed around the bureaucracy for a long time before anything concrete comes out of it.

With trade talks between the EU and UK deadlocked, Britain is again confronted by the prospect of a no-deal Brexit come the end of the year, writes Chris Giles. And with the UK economy already ravaged by coronavirus, some economists and policymakers in Britain are wondering whether the effects of the UK failing to secure a trade deal with Brussels could be masked by the impact of the pandemic. Yet a large majority of economists still question why the government should compound its difficulties with unnecessary further pain.

Scarcely possible to believe (and contrary to Trade Secrets’ predictions at the beginning of the year, so what do we know?) but the UK appears bent on declining an extension of the Brexit transition period at the end of the year and leaving, if necessary, with no deal. We and others have pointed out that the kind of bare-bones bilateral trade agreement you could get negotiated by December will in any case feel more like no deal than it will a continuation of the current arrangements.

There’s a feeling afoot among Brexiters that if Covid-19 will be disrupting trade anyway, why not have a no-deal Brexit as well and institute a Year Zero of reformulating supply chains? This brilliant Twitter thread of a few weeks back by the redoubtable Nicole Sykes of the CBI demolishes the idea. A no-deal Brexit means much more paperwork, stockpiling and regulations whether you leave existing supply chains in place or not. And it’s always easier for a business to make changes when it has money rolling in to smooth the transition. There are no economies of scale for hammering your supply chains in two different ways at the same time. The Year Zero suggestion is a lethally bad idea.

The chances of Donald Trump being re-elected are falling. That is a source of danger

It Can’t Happen Here was the title of a 1930s novel about America. Fascism never came to America — nor is it likely to. But martial law, or something close to the militarisation of America’s cities, is plausible. In the past few days, residents of Washington DC have become familiar with the low-flying helicopters, sand-coloured Humvees, nightly curfews and uniformed men that go with military control.

Were these scenes unfolding in Hong Kong every think-tank in America’s capital would be scheduling emergency webinars. As it is, people are too dazed by the novelty to gauge the risk. The chances of Donald Trump being re-elected in November are not very high. That is the source of America’s danger.

But first, the good news. The Pentagon has no interest in breaking a 233-year habit to interfere in US politics. Mark Esper, the US defence secretary, frightened a lot of people earlier this week by referring to America’s streets as “the battle space” in support of Mr Trump’s call to dominate the protests.

On Wednesday, Mr Esper reversed himself and disavowed military control of America’s cities. This is likely to get Mr Esper fired, possibly within days. His statement was as close as you get to resigning without doing so. Shortly afterwards, the Pentagon said it would be withdrawing 1,600 US troops that had been moved to the Washington area.

Unfortunately, the bad news outweighs the good. That troop order was then itself reversed. As has been said before, Mr Trump is a weak man posing as a strong one. On Monday, his attorney-general, William Barr, ordered the police to clear the square in front of the White House so that Mr Trump could do a photo-opportunity by holding a Bible in front of the local church.

This was in response to mockery that the Secret Service had taken Mr Trump down to the White House bunker as protesters gathered around its perimeter. Mr Barr, who shares none of Mr Esper’s squeamishness, is pushing that perimeter further out. National Guardsmen stand sentinel over the White House’s expanded boundaries.

What is the point of all this? The key is to view these images through the lens of reality television.

Mr Trump wants Americans to believe that the White House is threatened by domestic terrorists, arsonists, thugs, looters and killers — words he has used frequently in the past few days. US stability is under threat, he claims. The president’s life, and those of decent law-abiding Americans, are threatened by the extremists on the streets. That is the gist of Mr Trump’s message. But it requires a visual backdrop. Hence the hyped-up situation in Washington.

A more sober assessment is that Mr Trump’s poll numbers are dropping. He is faced with the triple cocktail of a badly-managed pandemic, the worst economic contraction since the Great Depression and an inability to quell the legitimate anger behind America’s demonstrations.

Most of those protests are peaceful. There has been looting and scuffles with police. So far, there is no instance of a protester having killed or maimed anyone, let alone a police officer. Several protesters have been killed or maimed by the police. Moreover, most of the looting appears to have been carried out by criminals under cover of the chaos.

It is a very different reality to the one Mr Trump depicts. There is little prospect of him legitimately reversing his fortunes in the coming months. I have lived in enough democracies, including America, to know a doom-laden government when I see one.

Mr Trump was fortunate to have avoided a real crisis in his first three years. Now he has three on his hands. His instincts are mostly optical. He is threatening to use powers that he does not have, such as sending the army into the streets. But he is refusing to use powers he does have, such as marshalling a national response to coronavirus.

These are the actions and inactions of someone with little interest in governing. But Mr Trump does have a burning desire to be re-elected. In his mind defeat would lead to the dismantlement of the Trump Organization and his prosecution and possible imprisonment.

Faced with a choice between sabotaging American democracy or a future spent in and out of court rooms, I have no doubt where Mr Trump’s instincts would lie. It would be up to others to stop him. 

Luxury carmaker is facing falling demand for its sports cars

Aston Martin is to cut 500 jobs as the carmaker overhauls its business in response to falling sales of its signature sports cars.

The pandemic has deepened the crisis at the luxury carmaker which was already trying to reduce a backlog of cars before the UK government lockdown closed its dealerships and showrooms.

Aston Martin said on Thursday that its business required a “fundamental reset” as it aimed for profitability, and that the proposed job cuts would help “right size” its structure. An employee consultation process will be launched in the coming days.

While Aston Martin said it had seen a strong order book for its first SUV, the DBX, it has had to reduce the volume of sports cars it builds in response to flagging demand.

Aston Martin slumped to a £120m loss in the first three months of this year, in part because of coronavirus closing factories and dealerships.

The company said it was also cutting costs at “every level” of the business, including contractor numbers, marketing and travel.

The restructuring is expected to deliver annualised cost savings of about £10m, while reduced manufacturing and capital expenditure costs should save a further £18m per year.

Andy Palmer stepped down as chief executive at the end of last month, as part of an overhaul of the leadership and board by Canadian billionaire chairman Lawrence Stroll.

Mr Palmer will be replaced on August 1 by Tobias Moers, the head of Mercedes-AMG.

French group’s purchase from UK utility SSE marks its first big move into offshore sector

Total is to acquire a majority stake in a £3bn North Sea renewable energy project from UK utility SSE, marking the French oil major’s first significant move into offshore wind.

For the 51 per cent share in what will be Scotland’s biggest offshore wind farm, Total on Wednesday said it would pay £70m upfront when the deal closes and £60m from earnings to the seller, subject to performance. 

Total will fund its share of capital investment in the Seagreen 1 project, at just over £1.5bn, mostly using debt. 

The move is the latest sign of traditional oil majors pursuing large-scale renewable energy projects as they seek to persuade investors and environmental activists they are serious about cutting their emissions footprint.

Companies including Total, Norway’s Equinor, Royal Dutch Shell and Spain’s Repsol have in recent years invested heavily along the electricity supply chain, from power generation to electric car charging points. 

Total last month pledged to achieve net-zero emissions across its operations and products in Europe by 2050, while its peers have announced similar ambitions. But they still plan to allocate the bulk of spending to fossil fuel production. 

The UK is the world’s biggest offshore wind market, with 37 projects representing a total of 8.5 gigawatts in operation, enough to power more than 7.5m homes. A further 3.8GW is under construction and 10.9GW has received planning consent, according to RenewableUK, a trade body.

Equinor is also building a sizeable footprint in offshore wind. Last year it won contracts, along with SSE, that allow it to build what will be the world's biggest offshore wind development, in the Dogger Bank region of the North Sea off the north-east coast of England.

The market has become increasingly competitive in recent years as oil and gas majors competed with traditional utilities for UK government contracts that promise a minimum price per unit of electricity produced.

At the latest big auction of government contracts last year, successful developers agreed to build projects for guaranteed prices at £39.65 per megawatt hour, a 30 per cent reduction on prices in an auction in 2017.