Economy
LVMH-Tiffany: how the love story between the two giants derailed
By Emmanuel Botta,
published on 18/09/2020 at 00:00 , updated at 19:27
Tiffany subpoenaed LVMH before judges in Delaware, USA, to force the French group to put the ring on her finger. Tiffany subpoenaed LVMH before judges in Delaware, USA, to force the French group to put the ring on her finger. afp.com/Johannes EISELE
LVMH wants to break off its engagement, arguing in particular of a catastrophic handling of the Covid crisis by Tiffany's executives. They don't want to hear anything.
If love stories end badly in general, to use the tube of Rita Mitsouko, it is much rarer to see one of the two lovebirds drag the other in front of the altar, against his will. Yet that's what Tiffany intends to do by subpoenaing LVMH in Delaware courts. In the 114 pages of his indictment, the New York jeweler tries to show that the world leader in the luxury industry is obliged to respect the commitment made in the fall of 2019 to pass the ring on his finger, with a cheque of more than 14 billion euros. "A wedding hailed at the time by the market, convinced that Bernard Arnault's company could, as usual, sublimate his bride and increase his margin," recalls Arnaud Cadart, portfolio manager at Flornoy and Associates.
An enigmatic intervention by Jean-Yves Le Drian
Las. On September 9th, everything changes. The world's number one luxury company says it is no longer able to carry out the transaction. At first, its communicators put forward a letter sent on 31 August by the Minister of Foreign Affairs, Jean-Yves le Drian. The latter reportedly asked LVMH to freeze the operation until 6 January, in order to help it dissuade Washington from introducing tariffs on products "made in France" on that date. A retaliatory measure against the possible introduction of a Gafa tax. But this missive quickly gives way to a shelling of Tiffany's poor performance during the pandemic, LVMH stressing in a press release "the mediocrity of their management during the crisis, which consisted mainly of widening losses and increasing debts at the expense of the interest of the company."
It would be several months ago that Bernard Arnault would fulminate by watching the results of his bride drift dangerously. In the first half of 2020, Tiffany's sales fell by 37%. Admittedly, the jeweler is not the only one to unscrew. The entire luxury market has been swept away by the health crisis. Bulgari, one of the seventy brands of the LVMH group, even saw its sales tumble by 43% in the first six months of the year. "But the Italian brand remained in the green, when Tiffany recorded $45 million in losses over the period," said a person close to the case. The explanation? For the LVMH teams, it is very clear: the leaders of the New York brand have put their foot down, convinced that the French company would finally pay the losses. Enough to derail the love story.
140 million euros in dividends paid despite losses
But what angered the French luxury giant was the 140 million dividends paid to Tiffany shareholders in the first half of the year, despite the losses. "Especially since we had to take on debt to pay these dividends," said one industry analyst. "Bernard Arnault took this as a real provocation when LVMH, which is doing much better, decided to reduce the dividends of its shareholders by 30%," says one expert on the matter. The New York jeweler recalls that
The last argument that the French group intends to make before the Delaware judges: the MAE (Material Adverse Events) clause included in the agreement signed between the two parties, stipulating that in the event of an exceptional event calling into question the profitability of the operation the nuptials can be broken without compensation. The health crisis is an obvious exceptional case for LVMH. On the Tiffany side, if we recognize the existence of this clause, it is pointed out that the clause has been accompanied by exemptions and that one of them mentions that if the whole market is affected, then that clause becomes null and void. "Tiffany has a concrete contract, that's why they attacked so quickly," said a person close to the case.
Delaware judges will now have to consider the thick marriage contract to decide whether LVMH has the right to let its bride fall or whether, on the contrary, the marriage should be consummated. If, from the latter's point of view, it is explained that the idea is absolutely not to negotiate down the purchase price, a source assures that nothing is excluded. It must be said that Tiffany's management team has a strong interest in the deal: CEO Alessandro Bogliolo alone would have to pocket $30 million if the deal goes through. Envy is always more constant than love..