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.

2 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

Leave a Reply