LVMH's Tiffany Bid Makes Strategic Sense

We are maintaining our fair value estimates for LVMH MC and Tiffany TIF as LVMH confirmed holding preliminary discussions regarding possible transaction with Tiffany. Previously, media sources including The Wall Street Journal and Bloomberg reported that LVMH offered to acquire Tiffany for USD 120 per share or around USD 14.5 billion (LVMH has not confirmed the price mentioned). As the potential offer values Tiffany only at around 20% premium to its recent closing price and below the highs of USD 136 reached in 2018, we believe that the offer would most likely be rejected and will monitor whether a higher bid would be on the cards. So far, we continue to value Tiffany as a standalone entity but will monitor the negotiations for a potential fair value increase.

We believe there is some scope for an offer increase. We estimate LVMH to have over EUR 40 billion additional debt capacity for M&A (assuming ND/EBITDA increases to 3.5 times) providing an ample room for the increased offer. The currently mentioned offer values Tiffany at around 14 times trailing EBITDA and around 3.3 times trailing revenue, versus 4 times revenue and 28 times EBITDA LVMH payed for Bulgari in 2011.

We consider both LVMH and Tiffany to be wide moat companies. We believe that the deal would strengthen LVMH’s position in a structurally growing jewelry market, where it is currently present with Bvlgari brand. We have long argued that branded fine jewelry is an attractive niche, growing structurally faster than the rest of luxury market, at over 9% pace on average annually since 2009 versus 5%-6% average luxury industry growth over the same period. We think entry barriers to branded fine jewelry are very high with high working capital intensity and gifting and investment demand, which favors brands that have been in existence for a long time. We believe there is just a handful globally established branded luxury jewelry brands, most of them boasting over a century-long history.

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