Tiffany (TIF) – Merger Arbitrage – 16% Upside

Current Price: $116

Offer Price: $135

Upside: 18%

Expected Closing: Late 2020 / Early 2021

Proxy

 

This is another short note on a potential merger with the elevated risk of termination and also an interesting case to track and see how easy merger agreements can be broken due to covid-19.

On the 24th of November LVMH announced acquisition of luxury goods (jewelry) retailer Tiffany for $135/share in cash. Until covid-19 outbreak TIF used to trade at 1% spread, which widened to 20% during March sell-off before settling to 5-6% levels.

TIF upside

Then at the beginning of June rumors appeared (and the spread increased accordingly) about the potential break or price amendment of this merger. So far, no official updates were released by the companies and this situation is in the rumor stage only.

  • 2nd of June - rumors appeared that LVMH is concerned about the transaction and that now the closing is uncertain.
  • On the 3rd of June reports appeared that Bernard Arnault (CEO of LVMH) is talking with advisers to find ways to pressure the target company and cut the proposed price. Meanwhile, it is also stated that Tiffany is still in compliance with the financial covenants under the merger agreement as sees no basis for the price renegotiation.
  • Then on the 4th of June LVMH stated that "it is not considering buying Tiffany shares on the market". Apparently this option was explored in March (market fall) as LVMH considered buying certain amount of TIF in the open market to reduce the overall price of the acquisition. Moreover, it was reported that Tiffany intends to go to the court if the buyer amends acquisition price.

So far it is uncertain how the tables will turn, however given the covid-19 impact on retailers it is very likely that LVMH is indeed looking for a way to ease the strain here.

On the positive side, it seems that the buyer is not looking for a way out as the strategic rationale is still there - TIF will strengthen LVMH jewelry and watch segment (one of the fastest growing segments in the industry) as well as increase its presence in US. Besides that, if the whole thing reaches the court and transaction breaks, the prospects of acquiring TIF at a later stage would be diminished.

Nonetheless, it is also possible that both companies will terminate the merger by mutual agreement as it has already happened with Sycamore/L Brands transaction. Sycamore announced intentions to walk away on the 22nd of April and despite the exchanged lawsuits and L Brands' claims to "vigorously defend the lawsuit and pursue all legal remedies to enforce its contractual rights, including the right of specific performance", both companies agreed to mutually terminate the merger on the 4th of May.

So if things go south after all, downside could be considerable (-25%) as TIF would likely fall to $90/share levels (before the initial announcement in mid-October-19), which is also the level at which the luxury index is trading right now.

 

Remaining conditions

Transaction is not subject to financing and the necessary credit facilities have been secured by LVMH. US, Canada and Australian antitrust approvals have already been received, however consents from Mexico, Russia, China, Taiwan, Korea, Europe as well as Australian foreign investment regulator (extended the review until Oct'20) are still outstanding.

30 COMMENTS

  1. Ilja

    TIF reported its fiscal quarterly results (ending in April), which showed a substantial hit to sales (-43% YoY) and EPS turning negative (-$0.53/share vs $1.03 YoY). In April retail store closures peaked at 80%, however by the end of May the company had 80% of its stores worldwide open again. After the re-opening, sales in China have spiked up significantly – May’20 sales showed 90% growth vs May’19.

    Moreover, to increase its financial flexibility and keep the deal with LVMH going, TIF amended debt agreements with its lenders (as permitted in merger agreement), therefore LVMH should now have a harder time finding a legal way to walk away from the transaction.

    Spread stands at 8%.

    https://www.sec.gov/ix?doc=/Archives/edgar/data/98246/000009824620000099/tif-2020430x10q.htm

  2. g4734g

    This came out today….TIF popping $4

    LVMH CFO SAYS IN FIGARO INTERVIEW: TIFFANY RESULTS HAVE BEEN HIT BY THE CORONAVIRUS CRISIS, BUT WE HAVE SIGNED AN ACQUISITION CONTRACT THAT WE WILL RESPECT

  3. Rick Sanchez

    best way to play this? ITM call options?
    I’m looking at the January 2021 Calls (assuming the deal closes at the outside range of 11/24/2020).
    The CFO comment was reassuring, and now we’re down to 4 regulatory approvals needed (EU, MX, JP, and Taiwan).

  4. Rick Sanchez

    I did my own HHI analysis for EU MX and JP and I don’t see any grounds for the respective regulatory bodies to nerf the deal. The luxury jewelry market is fairly fragmented and TIF isn’t a huge player in those foreign markets.

    I think MX will approve as early as mid-August (I est. 8/14), ahead of the next earnings report on/around 8/27. If there is nothing about covenant breaches in the next 10-K, I’d expect the rest of the approvals to roll in and the deal to close by 11/24 (3 mo. extension from 8/24).

  5. Dunkincoffee

    I own some Jan’21 calls for TIF. A few 125 strike and a few 130 strike. Why do you prefer the ITMs to the OTMs given the chances of reduction in price is quite low at this point?

  6. Rick Sanchez

    Dunkincoffee, you have a good point. I don’t have a great reason other than $120 was the initial deal price. Will probably add some OTMs as well. Thank you!

  7. Dunkincoffee

    No problem, always enjoy the discourse. If the deal breaks, we walk out with our head in our hands with either the 125’s or the 130’s. I have more 130’s than 125’s, prefer the leverage.

    1. Rick Sanchez

      Your comment helped me change my view – the deal working out is a binary event (either it closes by Nov at $135 or it doesn’t). So if you’re betting on that, might as well maximize the returns and go with the highest % return (which is the $130s).

      Does anyone have access to the Dealreporter article that says the European Commission is looking to provide an answer by late Aug or early Sep?

    2. Rick Sanchez

      @ Dunkincoffee, how do you feel about our options, post-earnings and the 8-K?

      1. Dunkincoffee

        Hi Rick, my thoughts haven’t changed materially. I view the earnings as evidence that the business has sustained no permanent damage from Covid. The wording in the 8-k is interesting, not really sure what to say besides that i’m sure Arnault is pissed at himself for basically pulling the trigger on the deal right at the top. I don’t see a way for him to wiggle out unless he gets lucky and one of the various regulators “bails him out”, which seems unlikely at this point. I upped my call position by about 10% on this pull back. This is a trophy asset, in my view, trophy assets get sold.

        Do you have any updated thoughts?

        1. Rick Sanchez

          Dunkin, I’m kind of in the same place you are.
          I have one new data point to share w/ the group which indicates that LVMH is serious about closing the deal:

          “One of Louis Vuitton’s top executives, Anthony Ledru, has emerged as a frontrunner to take over the CEO job at Tiffany & Co once its acquisition by LVMH is completed, several industry and headhunting sources told Miss Tweed….”
          Source: https://www.misstweed.com/detail-article.html?id=16

          Good on you for adding a bit at better prices! I kind of got cold feet a little and didn’t do anything. But now I’d say with the (i) decent ER last week, (ii) the article above dated 8/30, and (iii) CNBC reporting incremental progress with EC (companies fielding minor questions from EC, should file soon in Sep), I’m back to feeling pretty good about a late November close at $135.

          If it all pans out, I’ll owe you a virtual cup of coffee (via Venmo).

  8. Rick Sanchez

    8-K today: NYC HQ reopening delayed a half year from Q4 2021 to Spring 2022 due to construction shutdown during COVID; and the October dividend declared (the latter being incrementally positive, implies no cash crunch/danger of breaching covenant). Hopefully, it is the last dividend we cash!

    Q2 2020 earnings to be reported on 8/27.

  9. g4734g

    Market seemed fine with 3 month delay yesterday, (was already obvious delay was coming as 8/24 was current date and reg approvals still outstanding) but filing saying LVMH reserves right to question validity apparently has spooked the stock this AM.

    TIFFANY – LVMH NOTIFIED CO IT RESERVES RIGHT TO CHALLENGE VALIDITY OF EXTENSION OF OUTSIDE DATE

    1. Rick Sanchez

      Yeah I see that too, trying to parse it now myself. Thanks for the heads up. Any thoughts?

      1. Alex15

        I think the interview on CNBC by David Faber sums it up quite well. The goal could be a price cut and not to let this deal fall apart. However, it’s unclear what chances LVMH stands to figure out a way to get a price cut. In my view, the wording is aggressive but on the other hand kind of precautionary in case the circumstances deteriorate and the tensions between LVMH and TIF increase. If LVMH wanted to go for a price cut they could have already tried, but they missed the chance with the revolver. The earnings report of TIF will be interesting.

        1. Rick Sanchez

          I mean I guess that’s the only thing that matters now – is it legally possible for LV to get out of what (by my untrained legal eye) looks like a pretty tight contract? Didn’t Tiffany say they’ll sue if LV tries to come down from $135? A price cut would have to be mutual and go back to a shareholder vote.

    1. Rick Sanchez

      LVMH will officially file for EU notification in the near future so that’s why it is not on that list yet.

      Last week, EC sent requests for info to LV, which is what is holding up the official notification. (paraphrasing Bloomberg).

      David Ferber from CNBC originally reported that the EU notification should have been this week, but that slipped a little so I think by mid-September.

    1. nostradamus

      Still, if the market believed this deal would be totally dead Tiffany would trade a lot lower this morning. down <10% isn't all that much all things considering.

  10. Rick Sanchez

    sigh well, I was wrong and wrong big time. Nothing useful to add here to the comments other than to say I sized this bet all wrong.

  11. Daniel

    I bailed out of this today, but I still think it’s likely a deal gets done. The timeline and price have have gone up in smoke, so the expIRR for me is too low now. And $110 results in close to break-even for me

  12. Zulu Investor

    I was wrong as well, but considering my loss was only -5% and the fact that possible downside could have been much worse (looking at March bottom or pre merger price, I think I will put this as a small L.

  13. Alex15

    This statement is the most surprising on to me:
    Chief Executive Officer Alessandro Bogliolo said, “The fundamental strength of Tiffany’s business is clear. The company has already returned to profitability after just one quarter of losses, and we expect our earnings in the fourth quarter of 2020 will actually exceed the same period in 2019.”

    1. Zulu Investor

      Fundamentals are fine. What isn’t so clear is the real intentions behind LVMH’s reason to break the merger. Of course, LVMH will be the first to cite economic downturn or political tariff concerns, as a reasons why TIF is fundamentally different. My quick guess is that with hindsight 20/20, LVMH management probably regretted buying TIF at the pre-covid valuation and are trying to see if there is any possible price cut or just walk away from the merger all together.

      1. Dunkincoffee

        Agree with this, the price was quite high to begin with. Given that the Arnault’s excuse of “the French government ‘ordered’ us to” is not likely to hold up in court, the French government even coming out to say that the letter was merely advice, not “binding”(see link below), is the bear case just that Arnault would rather pay the ~$500mn to walk away, including whatever other damages TIF can sue for? If not, how else does Arnault get out of this deal? I don’t have a good answer to that question but would enjoy hearing anyone that does.

        This is awfully embarrassing for Arnault, no matter how this saga ends.

        https://uk.reuters.com/article/uk-tiffany-m-a-lvmh-france-exclusive/exclusive-french-government-request-that-lvmh-delay-tiffany-deal-was-only-advice-source-idUKKBN2602TT

  14. Ilja

    Further developments in $TIF saga – the hearing date is set for the 21st of September, however, LVMH apparently tries to oppose the fast-tracking stating that there’s no emergency (although the deadline date is in November). TIF says that it shows LVMH lack of confidence in its legal position:

    “If LVMH were confident in its legal position, it would have no reason to oppose an expedited trial schedule,” Tiffany Chairman Roger Farah declared, adding that it was another attempt by the would-be buyer to “run out the clock” on the deal.
    https://www.bloomberg.com/news/articles/2020-09-16/lvmh-opposes-fast-tracking-tiffany-s-suit-over-busted-deal

    Tiffany also complaints about poor LVMH performance collecting the required regulatory approvals, however, LVMH now states that it filed with EU Commission and the two remaining consents (Taiwan and EU Commission) are expected before the deadline.
    Overall, it seems to me that the odds are somewhat in favor of TIF side here.

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