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France's King of Bling has US$20b to play with
LIKE expensive gems, luxury goods companies have scarcity value. If Bernard Arnault's LVMH Moet Hennessy Louis Vuitton SE is allowed to get its hands on Tiffany & Co, the American jeweller is unlikely to come up for sale again. That's something LVMH's biggest rivals, Kering SA and Cie Financiere Richemont SA, might want to consider carefully.
Financially they could both afford to make counterbids for Tiffany. An offer from either Cartier-owning Richemont or Gucci-owning Kering at the US$120 per share price proposed by Mr Arnault would lift their net debt to about 2.5 times Ebitda. That's not too much of a stretch. Kering also has a 15.7 per cent stake in sportswear maker Puma, worth about US$1.8 billion, which it could reuse on something more promising.
Both companies are no doubt extremely wary of taking on someone with such deep (and well-tailored) pockets as Mr Arnault. But it's a hard fight to sit out. Of the two, Richemont has most to lose from an LVMH-Tiffany tie-up. The combined Franco-American group would take the Swiss giant's position as the global leader in luxury jewellery, according to Bloomberg Intelligence.
Mr Arnault has a track record of turbocharging the brands he adds to his stable. Take the jeweller Bulgari, which has more than doubled its revenue since being bought by LVMH in 2011, according to analysts at Royal Bank of Canada. If LVMH repeated that trick with Tiffany, it would seriously challenge Richemont's flagship Cartier brand.
It would be a leap for Richemont to take on a lot more debt, especially when it's still integrating the acquisition of online retailer Yoox Net-a-Porter and is developing a Web joint venture with Alibaba Group Holdings Ltd. But these distractions might explain Mr Arnault's tactics in striking now for Tiffany.
As for Francois-Henri Pinault's Kering, it has lived with higher leverage in the past, although it tried to stick within a range of 1-2 times Ebitda. It certainly has room to expand in jewellery.
Along with watches, the category accounted for just 6.8 per cent of its sales in 2018. But many of Tiffany's products are in the so-called "accessible" luxury segment (sometimes priced at about US$1,000 or below), which Kering has been moving away from. The French group got rid of most of its stake in Puma last year to focus on the high-end stuff. Another problem for both rivals is that any counterbid would have to be above the US$120 per share on the table, and would probably provoke a response from Mr Arnault. The final purchase price would be even more of a stretch.
LVMH has a "balance sheet war chest" of more than US$20 billion, according to Deborah Aitken of Bloomberg Intelligence.
Of course, a competing bid could be funded partly with shares, but Tiffany might well prefer cash.
If Richemont and Kering can't be enticed, the American company will have to persuade LVMH that it's worth more without the help of an interloper bidding up the price. With its sales going in the wrong direction that looks difficult. But auction or not, it's Tiffany's job to make Mr Arnault pay up. BLOOMBERG
- This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.