Raising Tiffany's Fair Value Estimate After Bid by LVMH

We are increasing our fair value estimate for Tiffany & Co TIF to USD 135, to reflect the successful bid by LVMH. The transaction is approved by the boards of both companies and is expected to close in the middle of 2020 after approvals of Tiffany's shareholders and regulatory bodies. The transaction does not have a material impact on our fair value estimate for LVMH.

We believe the multiple paid (EV/sales of 3.7 times and EV/EBITDA of almost 16 times) to be steep. In our view, Tiffany would need to accelerate revenue growth to the high single digits and operating margin to above 25% to justify the price paid (this compares with three-year historical revenue growth of 2.7% and average operating margin of 18.3%). The high price paid underscores the scarcity of established fine jewellery brands in the market and high entry barriers to this industry, in our opinion.

We expect Tiffany to continue operating as a standalone brand within LVMH organization, but we expect it to benefit from better and faster negotiating terms with landlords, pulling research and development resources (for example for developing perfumes), and sharing know-how and talent pools.

As we stated previously, accelerating growth at Tiffany (which would ultimately lead to margin expansion through operating leverage) would be the path to unlock value but would require additional resources (store openings, refurbishment, and brand building activities).

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