hnnhcronin As the pandemic has shut down stores throughout the world and the economic recession will inevitably affect consumer spending habits, many strategic acquisitions, private equity investments, and other kinds of transactions set in motion before the onset of the virus are coming to a halt. For example, the largest, most renowned luxury conglomerate LVMH announced its planned acquisition of iconic New York-based jeweler Tiffany & Co, with JPMorgan and Citi acting as advisors to LVMH and Goldman Sachs and Centerview partners serving as sell-side advisors to Tiffany & Co. in November of 2019, the agreed upon transaction price was $16.2 Billion (14.7 Billion Euros), or $135 per share. Using 2019 financials, this values Tiffany at 3.93X LTM revenue and 15.9X 2019 EBITDA, compared to an average of 0.9 EV/LTM revenue and 6.7 EV/EBITDA transaction multiples in the first half of 2018 for the luxury industry. WHile it seems clear that LVMH is paying a large premium for Tiffany & Co., and using these multiples, Tiffany should only be valued between 3.70B and 6.8B. However, the average multiples over the past 5 years are significantly higher, with EV/EBITDA averaging 13.46x and EV/Revenue averaging 1.68 x for the 5 preceding years. Additionally, Tiffany’s intangible assets, namely its brand name, are likely of very high value, which, in addition to potential synergies, could explain the large premium LVMH is willing to pay for the brand.
Tiffany’s stock is only trading at $121.65 per share right now and not showing strong signs of improvement, especially considering a large portion of Tiffany’s sales are dependent on tourists in large cities and formal occasions to show off nice jewelry. Because of the recent subpar performance, LVMH called to reevaluate the purchase price and related terms of the acquisition; LVMH CEO Bernard Arnault reportedly attempted to pressure the involved Tiffany management to accept under $135 per share. While Arnault still feels that the acquisition price is too high, considering Tiffany stock has fallen from the $134 share price as of the 1st of the year, LVMH is holding off on renegotiation at least for now due to the difficult legal steps it will have to take. Since the deal still has yet to pass significant regulatory steps necessary for the deal to go through, there is still time to renegotiate the terms.
At the time the deal was announced, the merger appeared to benefit both companies, by adding some geographical and horizontal diversification; LVMH would gain a stronger position in the United States as well as in the jewelry industry, which as of right now is dominated by Switzerland-based Richemont, parent company to Cartier, Van Cleef & Arpels, and Montblanc among others. On the other hand, association with the prestigious luxury conglomerate should theoretically help Tiffany move back upscale after slightly cheapening its image due to a hyper-focus on less expensive, starter jewelry for younger consumers in the mid-2000s and 2010s. Additionally, by combining manufacturing and distribution capabilities, the two companies should be able to realize synergies and economies of scale.
In contrast to the LVMH acquisition of Tiffany, which is merely uncertain, the Private Equity firm, Sycamore Partners buyout of Victoria’s Secret from Parent brand LBrands (LB) has fallen through completely. In February 2020, Sycamore was intending to buy a 55% stake in Victoria’s Secret, which would enable the brand to go private and leave LBrands to focus primarily on its Bath and Body Works brand, but in early May the news broke that Victoria’s Secret terminated the deal. Victoria’s Secret cited the reasoning behind abandoning the $525 Million investment as expensive and time-intensive negotiations and legal proceedings. However, Sycamore partners was the party who initially had doubts about the transaction, following slumping sales, missed rent payments, difficulty paying vendors, and store closures throughout the Spring; while its possible the majority of these shortfalls are due to the Covid-19 pandemic, Victoria’s Secret has been struggling with falling sales and store closures for years. The troubles of the Victoria’s Secret brand is offsetting the reliably strong Bath and Body Works brand, as LBrands is experiencing a liquidity crunch; LBrands reportedly had to suspend its cash dividend as well as draw $950 Million from its Revolving Credit facility over the past few months. As of now, Victoria’s Secret plans to close over 250 stores in the US and Canada, and Bath and Body Works plans to close 50.
Overall the deal activity in M&A and Private Equity buyout markets are slowed, primarily because senior executives are focusing on ensuring the viability of their companies before acquiring or another at the moment. However, with retail and shopping being so heavily impacted by the pandemic, there is a chance that deal flow will resume at an increased rate as companies and PE firms look for opportunities to purchase companies with strong fundamentals for a low price.
