TIF Tiffany and Co

By Matthew Dalton and Suzanne Kapner 

Tiffany & Co. shareholders are expected this week to approve a merger with LVMH Moët Hennessy Louis Vuitton SE that would give the French luxury giant a big cut of the high-end jewelry market and close months of drama that nearly killed the $15.8 billion agreement.

Wednesday's vote is also expected to cap a deal in which LVMH's controlling shareholder, French billionaire Bernard Arnault, didn't get his way.

Mr. Arnault fought for months to renegotiate the merger after the Covid-19 pandemic threw the luxury industry into turmoil. He asked the French government for help getting out of it and later enlisted a Rothschild & Co. banker to conduct back-channel talks with Tiffany, according to people familiar with the matter. Mr. Arnault, upset over Tiffany's insistence on paying full shareholder dividends before the deal closed, demanded the jeweler lower the deal price by 11%, the people said.

Tiffany declined and pressed ahead with a lawsuit, filed in a Delaware court, to enforce the initial merger agreement.

In the end, LVMH agreed to buy Tiffany at a 2.6% discount from the original deal price. Tiffany made a $70 million dividend payment last week.

Mr. Arnault decided he would rather own Tiffany at a price close to the pre-pandemic agreement than continue to fight, a person familiar with the situation said.

Now he faces the challenge of reviving Tiffany at a time when the brand and the broader industry have suffered significant damage. LVMH's own lawyers, in a counter lawsuit in September, said the pandemic left the retailer with "no end to its problems in sight."

Among them: Many big-spending tourist shoppers who travel the world buying luxury goods have stayed at home due to the virus, depriving Tiffany of a key source of revenue. Tiffany depends heavily on mall stores in the U.S., retail locations that have been hurt this year.

"The sharp decline in foot traffic in malls, which are at the heart of Tiffany's retail strategy, will have a significant long-term detrimental impact on the company," LVMH said in its lawsuit.

Those problems come on top of other weaknesses, such as a product range skewed toward bridal jewelry at a time when fewer couples are getting married, analysts say.

"Tiffany is big on bridal, which is not the future," said Erwan Rambourg, a luxury-goods analyst at HSBC. Inside LVMH, Mr. Rambourg said, "the products will evolve dramatically. I think the stores will change dramatically as well."

A Tiffany spokesman declined to comment. Before the pandemic, the company had been working to revitalize its image, particularly with younger shoppers.

Tiffany retains much of the sparkle that drew Mr. Arnault in the first place, in particular a brand name that is one of the most recognizable in the luxury business.

Mr. Arnault had been eyeing Tiffany for years before making an offer to buy the company in October 2019 for $120 a share. After several weeks of negotiation, LVMH struck a deal to buy Tiffany for $135 a share, close to the company's all-time high.

Weeks later, the first cases of the coronavirus were reported in Wuhan, China. By March, luxury boutiques across the world closed as major economies went into lockdown.

Over the summer, LVMH representatives asked French Finance Minister Bruno Le Maire for a letter that would lay the grounds for the company to renegotiate or pull out of the merger agreement, French officials said. Mr. Le Maire refused.

On Sept. 8, LVMH told Tiffany that it had received a letter from French Foreign Minister Jean-Yves Le Drian asking the company to delay its purchase of Tiffany until Jan. 6, 2021, to help France in international tax and tariff negotiations with the U.S. government.

The next day, LVMH said it was pulling out of the deal. Tiffany promptly filed a lawsuit seeking to force LVMH to buy the company or pay damages. Tiffany Chairman Roger Farah said in a statement the same day that LVMH had "unclean hands," suggesting that the company had asked the French government to write the letter. The phrase infuriated Mr. Arnault and LVMH's management, according to a person familiar with the situation.

"That was too much," the person said.

On Sept. 16, Tiffany's adviser on the deal, Blair Effron at Centerview Partners, received a call from a French banker, Grégoire Heuzé, then at Rothschild in Paris. Mr. Effron was surprised to hear from Mr. Heuzé and not from bankers at Citigroup Inc., which had been working for LVMH on the deal, some of the people said. Mr. Heuzé had previously advised Mr. Arnault in 2017 on a transaction uniting LVMH and fashion house Christian Dior SE.

Mr. Heuzé suggested LVMH would be interested in settling. Mr. Effron relayed the message to Mr. Farah, who said, "No thanks. We like our chances of winning in court," people familiar with the discussion said.

In early October, Mr. Heuzé told Mr. Effron that LVMH would be willing to settle for $120 a share, down from the original price of $135. Mr. Effron replied that Tiffany would be unlikely to accept such a large discount, according to regulatory filings.

On Oct. 15, Tiffany released preliminary results for August and September 2020 that showed its business had begun to stabilize. World-wide sales had decreased slightly but operating earnings had jumped 25% from a year earlier. The company also reported strong e-commerce sales and growth in China.

On Oct. 18, Mr. Heuzé raised the offer to $131 a share, according to the filings. Mr. Effron responded that the price would need to be $132 a share and that Tiffany would likely require an "airtight" contract that would prevent LVMH from walking away, according to the filings.

Mr. Heuzé said LVMH was prepared to settle for $131.50 a share. Mr. Farah felt it would be worth accepting a small discount for the certainty of getting a deal done, the people said. The two companies announced an agreement at the end of October, with LVMH paying $131.50 a share. In November, Mr. Heuzé left Rothschild to join Centerview's Paris office.

The discount saved LVMH $440 million, less than 1% of its 2019 revenue. Those savings were reduced by the $141 million that Tiffany paid in dividends in August and December, which LVMH could have avoided by completing the deal more quickly.

"It seems it was more of a question of principle," Mr. Rambourg said. "Was it worth the time spent and the cost of legal action? I don't know."

Write to Matthew Dalton at Matthew.Dalton@wsj.com and Suzanne Kapner at Suzanne.Kapner@wsj.com

(END) Dow Jones Newswires

December 28, 2020 07:43 ET (12:43 GMT)

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