LVMH's bid for Tiffany puts pressure on rivals to respond

Paris

AS the maker of top-end goods from Louis Vuitton handbags to Dom Perignon Champagne to Fendi furs, LVMH has a value to match, exceeding the combined market size of its top rivals and turning chairman Bernard Arnault into Europe's richest man.

Now a proposed purchase of Tiffany & Co stands to set the luxury powerhouse apart even further from the competition. In what would amount to the industry's biggest-ever deal, Paris-based LVMH has offered to take over the iconic US jewellery house for US$14.5 billion. Tiffany is studying the proposal.

If successful, the deal would achieve several goals for Mr Arnault: balance out a portfolio that currently favours fashion, beauty, and beverages; increase LVMH's weight in the US market; and snap up one of the only global luxury brands left that isn't locked up in family control.

For its main European rivals - Kering SA and Richemont - the latest foray by LVMH stands to leave them in a bind. They're forced to decide between getting into a bidding war that could erode their financial positions or sitting back while Mr Arnault charges ahead.

A deal with Tiffany - which for generations has set the gold standard for American wedding proposals - is attractive "because of the scarcity of acquisition targets in jewellery with a global scale", RBC analyst Rogerio Fujimori said on Monday in a note to clients. Watches and jewellery are the only category of luxury where LVMH is not already the leader, Mr Fujimori added, "and we know Mr Arnault likes to be always #1".

With both LVMH and Tiffany making it clear that the non-binding offer is far from a done deal, Mr Arnault's competitors are left to ask if there's a way to respond through a competing bid or some other transformational deal. While there are no other assets available that would achieve what Tiffany promises, getting into a contest with deal-hungry Mr Arnault risks becoming an expensive proposition.

Richemont owns Cartier, the only other jewellery mega brand besides Tiffany, as well as smaller houses like Van Cleef & Arpels. It would be loathe to lose its lead in the category, whose rapid growth has helped compensate for performance swings at watch brands like Jaeger-LeCoultre in recent years.

Johann Rupert, the South African mogul who controls Richemont, isn't known to relish a fight with Mr Arnault, nor the idea of taking on debt to finance his acquisitions. Whereas he's had success taking brands like Cartier, Piaget and Van Cleef from big to global, other purchases like French handbag-maker Lancel flopped. Even if Richemont could assemble the financial firepower to top Mr Arnault's bid for Tiffany, the group is still digesting the acquisition of Yoox Net-a-Porter last year, its biggest takeover to date.

"For Richemont it's a problem," said Flavio Cereda, analyst at Jefferies in London. "Either you buy Tiffany and you're ultra-exposed in watches and jewellery, or you don't buy it and suddenly there's a No. 2 player that could, in a few years, catch up. They've got to think fast about what they're going to do."

Fashion-focused rival Kering's jewellery portfolio is more niche: adding Tiffany could give it a critical mass to help grow houses it already owns, like Italian ring-maker Pomellato and Paris-based Boucheron. It would also help scale back the group's dependence on Gucci, which made up three-quarters of profit last year.

And while Kering's controlling shareholder, Francois Pinault, is no stranger to going head-to-head with Arnault after fighting bitter battles over Gucci and Saint Laurent, recent years have seen the company walk away from a deal when the price wasn't right. Acquiring Tiffany would push Kering's debt to several times annual earnings. And counter-bid to muscle out LVMH would dilute the financial strength the company has built up during several years of rapid growth at Gucci.

Yet jewellery is a category that the luxury industry can ill afford to ignore, ranking as one of the most promising motors for growth in the field. Global brands control only a fraction of this market, with smaller workshops and white-label suppliers to jewellery sellers making up the bulk of sales. That spells an opportunity for luxury groups, compared with sectors like fashion and alcohol, where big brands already dominate the market.

Mr Arnault has shown he can pack the punch of the LVMH group to elevate businesses he's purchased. Bulgari, the Italian jewelry house he took over eight years ago, has seen sales and profitability improve under the new ownership, and has expanded the brand to hotels and resorts.

Jean-Christophe Babin, the former TAG Heuer CEO whom LVMH picked to lead Bulgari, has said the growth rates enjoyed under LVMH's umbrella might help the label someday surpass Cartier. Should LVMH repeat such rapid expansion with Tiffany, it would put rivals even more on the back foot.

Tiffany is one of very few recognisable names with global scale, lagging only Cartier in annual sales, and is the only one without a controlling shareholder. BLOOMBERG