LVMH, the French luxury goods giant, agreed in November to buy Tiffany (NYSE:TIF) for $135 a share, according to sources familiar with the matter. Louis Vuitton is currently considering buying the jeweler’s shares on the open market at a lower price.
Louis Vuitton has discussed the idea with Tiffany’s board, which may allow such a potential stock purchase after the results are announced, according to anonymous sources familiar with the matter.
The French group has not yet made a final decision on whether to make selective market-buying activities and is discussing possible legal hurdles to the idea, another person familiar with the matter said.
The unusual move could mean that the Paris-based Louis Vuitton Group could buy Tiffany’s shares at nearly 13 per cent below the offer price, based on Tiffany’s recent share price. This can be an example of how companies are coping with the market crash caused by economic worries related to the new corona virus.
It will also highlight the commitment of Bernard Arnault, Louis Vuitton’s chief executive, to the deal.
“Louis Vuitton’s actions are strategic and long-term,” Francesca Di Pasquantonio, an analyst at Deutsche Bank, said in a telephone interview. He added: “It took them a long time to find the right time to do this deal.” “
Before Bloomberg reported the plan, Tiffany’s share price was about $118 a share. By the close of trading on Thursday, Tiffany’s shares had risen to $126, giving the company a market capitalisation of about $15 billion. In French stock market Friday afternoon, Louis Vuitton shares jumped more than 8 percent.
New York-based Tiffany said it would temporarily close all of its stores in the U.S. and Canada, as well as “many others.” Tiffany reported an 8 percent drop in net profit for 2019, according to its results earlier on Friday.
Same-store sales were a key indicator for retailers, with Tiffany’s results showing a 3 percent increase in same-store sales, which are not included in the impact of currency movements. A representative for Louis Vuitton declined to comment, and Tiffany’s representative sought a request for comment.
The Risk Arbitrage Fund Deal spread, the difference between the price a company agrees to sell its shares and the current value of the shares, reflects market confidence that mergers and acquisitions can overcome regulatory, financing or other unpredictable obstacles and are completed. Over the past two weeks, the spread sprees on those outstanding deals have widened sharply as nervous investors re-evaluate even what looks likely to be done.
In Tiffany’s case, the spread has risen from just 64 cents on February 13 to about $17 on Thursday. This means that if Louis Vuitton completes the deal, traders who buy Tiffany shares will earn $17 per share.
By buying shares on the open market, Louis Vuitton can save the same amount. The sudden expansion of spreads not only reflects widespread anxiety in the market, but also highlights the pressures faced by so-called risk arbitrage hedge funds that specialize in mergers and acquisitions. Over the past few years, quantitative hedge funds willing to invest in already tight trading spreads have made a boom by using high leverage to boost returns.
According to people familiar with the matter, the current crisis in the new crown epidemic has led to a rapid reversal of confidence, which has led to a number of companies facing margin call notice and liquidation, thus making the spread further widened.
Bloomberg’s GrowIng Market ShareA index, which tracks luxury goods companies, has fallen by nearly a third since the start of the year as a new virus outbreak hampers consumer demand for high-end products. Richemont, the parent company of well-known brands such as Cartier and Van Cleef and Arpels, has fallen to its lowest level since 2012.
During previous economic downturns, Louis Vuitton strengthened its advantage over rivals by increasing (or at least maintaining) the company’s share of the high-end luxury market by continuing to invest.
So even in the current market slump, the logic of the world’s biggest luxury goods makers still wanting to buy one of the best-known brands in the jewelry business remains intact. If Louis Vuitton doesnot buy Tiffany, it will be difficult for Louis Vuitton to gain a share of the market because of the high threshold for so-called “hard luxury” product categories, including jewelry and watches, cowen analysts, led by Oliver Chen, wrote in a research note released Thursday.
“We are confident that both companies will be determined to close the deal. The report reads. “Louis Vuitton has probably been looking, considering and wanting this asset for years. “