Why Tiffany Should Tell LVMH “No Thanks”

LVMH’s $14.5 billion bid to take over Tiffany calls to mind the luxury conglomerate’s purchase of another high-end jeweler, Bulgari, in 2011.

At the time, Bulgari’s CEO, Francesco Trapani, told Bloomberg: “[M]ore and more, I think the big groups will be the protagonists of the luxury business.… Life will be progressively more difficult for the independents that are not large enough.”

Trapani eventually took over LVMH’s watch and jewelry division. He’s now a member of Tiffany’s board of directors.

It’s not hard to find analysts who agree with him, who feel that Tiffany should hook up with a luxury conglomerate because, well, that seems to be the thing to do these days.

“Existing brands and retailers need to evolve and understand how to do so efficiently, which for many means joining forces with others or becoming part of a larger group,” Alexis DeSalva, a senior research analyst at Mintel, told The Daily Beast. “There’s strength in numbers.”

Still, while LVMH has considerable financial resources, it may not lavish them on Tiffany. Companies don’t lay out upwards of $14 billion without wanting it back.

Clearly, LVMH has a lot to gain from this acquisition. Watch and jewelry sales currently represent 9% of its sales and 7% of its earnings.

“Hard luxury is the only subsector where LVMH is not the leader,” Royal Bank of Canada analyst Rogerio Fujimori told Forbes, “and we know that [LVMH chairman Bernard] Arnault likes to be always number one.”

Glossy even suggested LVMH could learn from Tiffany’s embrace of technology.

Yet taking over Tiffany would also be LVMH’s biggest acquisition ever—and possibly a gamble.

“[Arnault] has favored a series of smaller, lower risk acquisitions to build his empire of luxury brands,” wrote The Wall Street Journal.

“This is a big thing for LVMH to acquire,” Charles Beckwith, cohost of American Fashion Podcast, told The Daily Beast. “Tiffany’s is about one-third the size of Louis Vuitton. Think about eating something that’s one-third the size of your mass.”

Which calls to mind another takeover, Signet’s purchase of Zale Corp. Back then, Signet was a widely admired company, like LVMH is now. When it purchased Zale, it almost doubled its size.

Ultimately, ingesting such a big meal just left it bloated. After some initial buoyancy, the acquisition sent Signet into a downward spiral from which it has yet to recover.

The Zale takeover also put just about all the industry’s leading mall brands under one umbrella. Since then, that umbrella has sprung a few leaks. That could also be a problem here. Isn’t it better to have more companies in this industry, competing, and raising the sector’s collective game?

LVMH already controls so many big names that some have labeled it “the Walmart of luxury.” In 2017, after LVMH bought Christian Dior, Quartz wrote, “Almost all of luxury fashion is now owned by two French families”—the Arnaults, who own LVMH, and the Pinaults, who own Kering.

High-end jewelry has a few more players, but still, that’s a lot of the market controlled by not a lot of companies. Aren’t we better off spreading the risk around?

To be fair, if Tiffany does get bought, LVMH is probably as good an owner as any. It has a remarkable stable of luxury brands. Its most recent financial results were stellar. And it’s a far more suitable parent than Avon, whose five-year stint running the brand in the 1980s was widely considered a disaster.

It’s also done well with jewelry. Bulgari has thrived under its wing, and its 2018 watch and jewelry sales rose an impressive 12%, with profits jumping 38%. That said, its record is not flawless. De Beers Diamond Jewelers, its co-venture with the diamond giant, has not made much money in its 18 years of existence. (In 2017, the year LVMH exited the venture, it posted a $24 million loss.)

LVMH has signaled that while it wants Tiffany, it’s not ready to break the bank for it. A source told the New York Post that the company isn’t likely to increase its offer by more than $5 a share, which would be less than its current stock price.

“They feel they do not need the asset,” said the source.

Likewise, it’s not clear that Tiffany needs the owner. It’s reliably profitable. Its market cap is $15 billion, up from $12 billion before the bid. It generates $2,951 of sales per square foot, making it one of the best performing retailers in the world. (Only Apple, a frozen yogurt seller, and gas station chain do better.) And despite years of takeover rumors, this offer was unsolicited.

Its current CEO, Alessandro Bogliolo—a veteran of Bulgari—is undeniably sharp. On earnings calls, analysts not only ask him about the company but pick his brain about the luxury world in general.

Results have been mixed of late, but it’s hard to fault management entirely for that. Analysts cite “macro headwinds” from China and Hong Kong, but LVMH is hardly immune to those headwinds, which won’t last forever in any case.

Traditionally, the retailer has turned away suitors. “[W]e are furiously and ferociously independent,” said former CEO Frédéric Cumenal in 2016. “We have access to all resources that we need.” Five years earlier, his predecessor Michael Kowalski said, “We feel strongly that the interests of our own shareholders are best served by remaining an independent company.”

Today, Tiffany stands as not only one of the best brands in the jewelry industry, but one of the most respected brands in the world. That’s because it’s had executives who have cared about the retailer and its legacy and carefully protected it. Even without the backing of a big conglomerate, it arguably gets more publicity today than its peers, some of which have equally notable histories, including Cartier (owned by Richemont), Harry Winston (owned by Swatch), and Bulgari (owned by LVMH).

For more than four decades, Tiffany has flourished standing on its own blue feet. It’s stayed special because it’s been treated that way. It doesn’t need to be another scalp in a billionaire’s trophy case.

(Image courtesy of Tiffany & Co.)

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JCK News Director

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