LVMH Moët Hennessy Louis Vuitton SE (LVMHF, Financial) signed a merger agreement to buy Tiffany & Co. (TIF, Financial) at a sum of $135 per share. Now, the French luxury conglomerate is trying to get away from the deal.
Its board issued a curious press release that cited a directive by the French government to delay the merger into 2021. At the same time, the board wished to comply with the merger agreement that includes a drop-dead date in November.
In response, Tiffany filed suit in Delaware to force LVMH to clinch the deal at $135 per share, notwithstanding its change of mind. Here's a key piece of the LVMH press release:
"... The Board learned of a letter from the French European and Foreign Affairs Minister which, in reaction to the threat of taxes on French products by the US, directed the Group to defer the acquisition of Tiffany until after January 6th, 2021...
"... As a result of these elements, and knowledge of the first legal analysis led by the advisors and the LVMH teams, the Board decided to comply with the Merger Agreement signed in November 2019..."
It is a bewildering line of reasoning. The board wants to follow the directive (or sees no choice) but also "wants to" uphold the merger agreement. Upholding the merger agreement in this case means that the deal will be dead.
According to Tiffany, an order like this isn't valid under French law. As per Tiffany's 8-K:
"There is no basis under French law for the Foreign Affairs Minister to order a company to breach a valid and binding agreement, and LVMH's unilateral discussions with the French government without notifying or consulting with Tiffany and its counsel were a further breach of LVMH's obligations under the Merger Agreement."
I'm not a lawyer, but to me it looks like the board does not want to uphold the merger and is looking for an excuse, because LVMH has made no attempt to close the deal while following the order. For example, it could ask its counterparty for an extension.
It gets weirder because Bloomberg reports that LVMH's Chairman reached out to the French government in advance of the letter containing the directive. I'm going to quote Bloomberg verbatim because what Bloomberg is literally saying could become important:
"LVMH cited a letter by Foreign Minister Jean-Yves Le Drian about the trade dispute with the U.S. as a reason to get out of the deal. One person said the billionaire personally reached out to the government to get a state of play on those talks.
Arnault initially sought support from the finance ministry, which rejected him, before going to the foreign ministry."
According to the merger agreement between the two parties, an executive talking to the government to get out of the deal could be constituted a breach of said agreement. In its lawsuit, Tiffany is also alleging LVMH breached the merger agreement.
In addition, Tiffany claims that LVMH didn't provide it with the original letter but only a translation. Yahoo reports that a French government official has said the letter was not binding but merely urging LVMH to take this course of action. LVMH's Financial Director Jean-Jacques Guiony claims the letter obliged the company to delay the merger.
It remains speculative for now, and often there's not much else to go by in M&A situations, but in my opinion, it increasingly looks like the LVMH board interpreted the language in the French government letter too strenuously (perhaps intentionally), even if it contained a directive that could very well not be legal under French or European law.
LVMH killed the merger by reaffirming the merger agreement, citing the unfortunate consequence of the government directive. However, suppose that directive is not so much an order but more like a request. That could mean the deal is actually alive.
That also explains why Tiffany isn't down much. It is still trading at $113 per share. Meanwhile, I estimate the price could fall to $60 if the deal were called off for real.
| Name acquirer | Name target | Target ticker | Acquirer ticker | gross spread | expected annualized return | Days remaining until close | estimated closing probability | Cash |
| LVMH Moet Hennessy Louis Vuitton SA Unsponsored ADR | Tiffany & Co. | TIF | LVMUY | 15.95% | 12.49% | 83 | 75.48% | 135 |
Image: author's model
If I assume a closing probability of 75%, a break price of $60 and an average 83 days until close, I get to an expected annualized return of 12.49%. I actually think the closing probability is a little bit higher, but I've tried to remain conservative, as this is all still up in the air and there is much we don't know.
I also think that if the deal does break, there could be a path for either Tiffany or its shareholders to extract damages from LVMH depending on the exact way the deal breaks. It is a scary situation, but with Tiffany at $113, a deal price of $135 and only months remaining until the drop-dead date, the risk/reward appears attractive to me.
Disclosure: author is long TIF [Tiffany]
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