Tiffany & Co. (TIF - Free Report) is all steamed up as its proposed takeover by France-based luxury goods group — LVMH Moet Hennessy Louis Vuitton SE or LVMH — stands stalled. LVMH has taken a step back from this deal, citing a request from the France government to delay the same on the grounds of tariff threats. It also highlighted certain other hiccups.
However, Tiffany is bent on not letting matters slip out of hands and filed a lawsuit against LVMH, claiming that the company’s move to scrap the deal has no contractual basis. The suit has been filed in the Court of Chancery in the state of Delaware
Well, investors seemed displeased with the takeover deal turning sour. This caused Tiffany’s shares to decline 6.4% in yesterday’s trading session. In the past three months, shares of the New York-based jewelry designer have lost 4.6% against the industry’s rise of 9.1%.
That said, let’s take a closer look at the aspects that casted a pall on the contract and whether Tiffany’s fight to save it stands a chance.
What Prompted LVMH’s Backout?
The Tiffany-LVMH deal dates back to November 2019, when the latter had agreed to buy the former for $135 per share or $16.2 billion in cash. The deal had an original closing date of Aug 24, 2020. In the meantime, LVMH failed to obtain antitrust clearances from the required jurisdictions. Hence, Tiffany elected to push back the deal-closure date to Nov 24, 2020. In recent developments, the government of France advised LVMH to postpone the deal until Jan 6, 2021, on tariff related threats from the United States.
LVMH stated that it intends to honor the request put across by the French government. Alongside, LVMH has informed Tiffany that it will not extend the agreement’s closing date beyond Nov 24, 2020. LVMH also asserted that there has been a Material Adverse Effect and a breach by Tiffany, thereby giving it the option to consider terminating the agreement. However, Tiffany claims that LVMH has not provided any basis for these assertions. Tiffany also states that LVMH’s allegations clearly indicate that it is no longer interested in completing the transaction.
While tariff tensions might have been the main cause for LVMH to consider withdrawing from the deal, market sources hint that the ongoing pandemic scenario might have also been a dampener. The coronavirus has hit the U.S. retail luxury segment hard, as consumers preferred to curb spending on non-essentials.
Is Tiffany’s Stand Justified?
Tiffany claims that LVMH has been deliberately stalling the takeover process for a while now, by citing issues such as U.S. social justice protests and the COVID-19 pandemic to avoid paying the agreed price. Tiffany also states that LVMH’s latest move to withdraw itself from the contract based on the French governments’ request is not justifiable.
Moreover, Tiffany highlights in its lawsuit that LVMH has breached its obligations under the contract with regards to obtaining antitrust clearance. As of Aug 24, LVMH had not even filed for antitrust approval in three of the required jurisdictions. Tiffany further pointed out that LVMH is yet to apply for antitrust approval in the European Union or Taiwan. In fact, applications are still outstanding in Japan and Mexico.
Furthermore, Tiffany claims that unilateral discussion between LVMH and the French government, without notifying or consulting with Tiffany, were a breach of LVMH’s obligations under the Merger Agreement.
Tiffany asserts that it has complied with all provisions of the agreement and is looking forward to its completion on the previously-agreed terms. The company stated that its business fundaments and financial performance have been stable, despite the pandemic. In fact, it returned to profits in second-quarter fiscal 2020. Moreover, it expects earnings in the fourth quarter to rise year over year.
Well, the pandemic has caused quite a few merger plans to take a backseat in the retail sector. Markedly, private-equity firm Sycamore had backed out of its deal to acquire Victoria’s Secret from L Brands (LB - Free Report) .
The lawsuit is an attempt on behalf of Tiffany to persuade LVMH to abide by its obligations and complete the transaction on the agreed terms. However, it is yet to be seen if the legal turmoil ends in the favor of the deal being completed. Tiffany is seeking to obtain a ruling prior to Nov 24, 2020.
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