LVMH has amended the terms of its deal to acquire Tiffany & Co. It has agreed to pay $131.5 in cash per Tiffany share, compared to the original price of $135. The value of the deal is now around $15.8bn.
The reduction comes as a result of LVMH's assessment that Tiffany & Co is worth less because of the effects of Covid-19, which saw it try to walk away from the deal. Both sides have now agreed to settle pending legal action.
LVMH shares were broadly flat following the announcement.
CEO, Chairman and 47.5% shareholder Bernard Arnault has guided LVMH group through a lot in 30 years, but nothing has come close to coronavirus.
Swathes of global stores were forced to close, which has knocked the wind out of revenue's sails. Compared to the half year things are looking better, but overall sales are unlikely to recover fully for some time. That will have an impact on full year profits, especially as LVMH isn't a particularly flexible businesses.
That's a function of LVMH's largely fixed cost base. That model helps boost profits when times are good, because once operating at capacity each additional sale doesn't cost a lot. But sadly the reverse is also true. When sales dry up it has a rapid and negative impact on margins.
The group also relies heavily on international travel with airport and hotel spending crawling to a halt in recent months. It's unclear when this side of trading is expected to normalise, but it's likely to act as a drag for some time.
The good news is the important Chinese market has rebounded well, and the US and Europe are showing signs of recovery. We should also note the high net-worth of LVMH's customer base means it should be able to weather an economic downturn better than some. This demographic tends to be less sensitive to economic shocks or recessions, meaning in store spending should turn back on quickly.
We had been worried that the group's blockbuster brands like Louis Vuitton and Christian Dior would really continue to struggle - with the VIP experience customers demand being something online sales just can't replicate. But we've been impressed by the trading here. Of course, there's still plenty of uncertainty around and it's pretty impossible to map exactly where demand levels are going to settle. That means it's important to look at the financial strength of the company. That leads us to the deal to buy Tiffany & Co.
Prior to the outbreak, the deal made a lot of sense. But having called Tiffany's prospects "dismal" in light of the effects of coronavirus, and trying to walk away from the deal, LVMH has successfully negotiated a lower price tag. We're a little dubious of the group's willingness to go ahead. If Mr Arnault's earlier assessment of Tiffany is correct, this will see LVMH's balance sheet stretched to acquire a potential burden, rather than a boost.
More generally we continue to have faith in LVMH's unrivalled stable of brands and more resilient customer base. However right now the group's in somewhat of a state of flux - both full year sales trajectories and the outcome of the Tiffany deal are unknowable at this point. The current share price valuation makes it sensitive to a fall if either of those key issues don't go as expected, so for now we'd suggest investors exercise caution.
LVMH key facts
- Price/Earnings ratio: 31.1
- 10 year average Price/Earnings ratio: 19.3
- Prospective dividend yield (next 12 months): 1.5%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Third quarter trading details (16 October 2020)
LVMH saw organic revenue fall 7% year-on-year in the third quarter, compared to a 28% fall in the first half. That takes revenue for the first nine months of the year to €30.3bn. "Encouraging signs of recovery" are being seen in all geographies, and there has been particularly strong trading in the Fashion and Leather Goods division.
The group's mindful of continuing economic uncertainty and provided no guidance for the full year. The delayed decision on payment of an interim dividend will be decided at the end of October.
In the group's largest division, Fashion & Leather Goods organic revenue rose 12% to €5.9bn, following sharp falls in the first half because of store closures. Louis Vuitton and Christian Dior performed very well, and the latter's new products received a good reception.
Selective Retailing, which includes beauty business Sephora and luxury travel retailer DFS, saw sales drop 29% to €2.3bn. Of the two, Sephora has been more resilient and has continued to take market share. The disruption to international travel severely affected DFS, and travel trends are "showing no signs of improving".
An organic revenue decline of 16% to €1.4bn was seen in Perfumes & Cosmetic. Demand is being hampered by reduced international travel and lower make up sales. The third quarter has seen online sales grow "steadily", and trading in stores is starting to pick up.
Wines & Spirit enjoyed a good performance from the Hennessy cognac and Champagne businesses. That meant the divisional declines were less severe than elsewhere, down 3% to €1.4bn.
Momentum in Watches & Jewellery was less positive, with revenue falling 14% to €947m. That was despite a rebound in activity in China, and a new line of Bvlgari pieces.
The countersuit relating to the acquisition of Tiffany has been filed, and LVMH expects to receive approval from the European Commission by the end of October. The trial is scheduled for January 5, 2021.
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