Luxury retailer Tiffany & Co. (NYSE: TIF) on Monday confirmed that it has received an unsolicited bid from Paris-based LVMH Moët Hennessey Louis Vuitton to acquire the renowned U.S. jeweler for $120 a share in cash. Tiffany’s shares closed at $98.55 on Friday.
At that price, LVMH is making a cash offer of around $14.5 billion for Tiffany, a premium of about 22% to Friday’s closing price.
In a statement, Tiffany said it is carefully reviewing the proposal “to determine the course of action it believes is in the best interests of the Company and its shareholders.” Investors seem more than pleased, driving shares up by more than 30% in premarket trading Monday.
There’s probably no way that Tiffany will accept that price. First of all, LVMH, with a market cap of around $218 billion, can afford to pay more. The company has virtually no debt and neither does Tiffany. According to a Bloomberg report, at the offer price, the combined company’s debt-to-EBITDA ratio would be just over 1x.
Second, the primary reason for LVMH’s bid is likely no more complicated than to keep some other buyer out of the luxury goods business. A reasonable competitor for Tiffany is privately held JAB Holding Company. The Luxembourg-based conglomerate retained a minority stake in leather-goods maker Bally when it was sold to China’s Shandong Ruyi Group last year and owns a controlling interest in cosmetics maker Coty. JAB paid $13.9 billion in 2015 to acquire Green Mountain Keurig and owns several other coffee and dining brands, such as Peet’s, Pret a Manger, Krispy Kreme and Panera Bread.
JAB matches up well with LVMH based on total assets. At the end of December 2018, LVMH reported assets valued at €23.55 billion ($2.61 billion) compared to JAB’s €23.64 billion ($2.62 billion). JAB was carrying €5.95 billion in debt to LVMH’s €5.69 billion.
The big question is how high either might go. Tiffany can certainly hold out for more, but is the company worth a lot more? Operating income in its most recent fiscal year was just $790 million and net income was $586 million. LVMH posted operating income of €9.96 billion in fiscal year 2018 and net income of €6.35 billion, while JAB’s net income for the first six months of 2019 totaled €4.99 billion. Paying around $15 billion doesn’t make an awful lot of financial sense.
Where a price like that makes sense is either in building a wider moat around your castle (LVMH) or buying a siege engine to chip away at someone else’s castle (JAB).
For now, though, Tiffany saw shares trade at $129.57 in Monday’s premarket, up 31.5% over Friday’s closing price, but retreat to $126.06 after about a half-hour of trading. The stock’s 52-week range is now $73.04 to $128.30, and the consensus 12-month price target is $104.04.