$16 Billion Is a Lot to Pay For a Diamond Ring Right Now

(Bloomberg Opinion) -- Even the most upmarket buyers like to get their money's worth. No wonder LVMH Moet Hennessy Louis Vuitton SE is having second thoughts about its $16 billion takeover of Tiffany & Co., according to Women's Wear Daily.

Walking away from the deal, which is due to close shortly, wouldn't be ideal after all the fanfare made about the merits of buying the iconic U.S. jewelry brand. But it would be remiss of LVMH Chairman Bernard Arnault not to try to get better terms — particularly since he has the advantage.

The world has changed since the takeover was agreed in November. The Covid-19 pandemic has dented luxury goods demand with shops shuttered and sweatpants-wearing consumers locked down with nowhere to go. Industrywide sales could fall as much as 35% this year, according to Bain & Co. The civil unrest in the U.S. is another risk, particularly for an American brand.

So, depending on the fine print in the purchase agreement, Arnault could try to wriggle out altogether. There are doubts that it will go ahead as planned. Tiffany shares closed at $117 on Tuesday, significantly lower than LVMH's $135 offer price. 

But dropping the deal now, particularly if it led to a lengthy legal battle, could risk some reputational damage. It could also signal that LVMH, the world's dominant luxury conglomerate, built on a history of strategic, successful acquisitions, isn't so resilient after all. 

True, even after the pandemic, LVMH's market capitalization is close to 200 billion euros ($224 billion). So Tiffany is a relatively modest transaction. But the French fashion giant won't have escaped the maelstrom, not only in luxury goods, but in cosmetics, with its Sephora chain, and in duty-free travel retail, with DFS.

Tiffany is still a prized asset, with huge potential if it can be elevated from simply affordable luxury to mega-bling. So Arnault is most likely to try to burnish his standing as a dealmaker by extracting better terms for his shareholders. Especially since Tiffany already needed some polish to achieve its potential, and the task will be even more difficult now. It will require significant investment both in the company's product range and marketing.

Against this backdrop, trying to save on the purchase price looks sensible. A precedent has already been set by Sycamore Partners, which tried to extract itself from its $525 million deal to buy lingerie brand Victoria's Secret. In the end, L Brands Inc. ended up terminating the agreement. But it's hard to see Tiffany doing this — it's unlikely to want to pursue its turnaround plan in a such a difficult environment without a muscular parent. Given the luxury slump, it's not obvious that Richemont or Gucci-owner Kering SA would step in.

Of course, Arnault could take his chances, withdrawing now — if he can — with the aim of trying to buy Tiffany again later at a lower price. But that's a risky strategy. Another friendly deal wouldn't likely be forthcoming, and often once a trophy asset is lost, it doesn't become available again.

Arnault would be better off holding onto this bauble, and, like many luxury shoppers right now, trying to negotiate a hefty discount.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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