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    Rajput Rishav
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    The acquisition of Tiffany by LVMH will strengthen LVMH's position in the global luxury jewelry market by increasing its market share from 8% to 18%. It will complement LVMH's existing business categories and geographic footprint. While the $16.9 billion price tag is high in absolute terms, it is reasonable relative to comparable acquisitions based on EV/EBITDA multiples. However, the deal will also lower LVMH's operating margins initially and increase its financial leverage. Overall, the acquisition seems a strategic fit that improves LVMH's long-term competitiveness, but it also carries increased financial risks.

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    The acquisition of Tiffany by LVMH will strengthen LVMH's position in the global luxury jewelry market by increasing its market share from 8% to 18%. It will complement LVMH's existing business categories and geographic footprint. While the $16.9 billion price tag is high in absolute terms, it is reasonable relative to comparable acquisitions based on EV/EBITDA multiples. However, the deal will also lower LVMH's operating margins initially and increase its financial leverage. Overall, the acquisition seems a strategic fit that improves LVMH's long-term competitiveness, but it also carries increased financial risks.

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    44 views2 pages

    Module 3

    Uploaded by

    Rajput Rishav
    The acquisition of Tiffany by LVMH will strengthen LVMH's position in the global luxury jewelry market by increasing its market share from 8% to 18%. It will complement LVMH's existing business categories and geographic footprint. While the $16.9 billion price tag is high in absolute terms, it is reasonable relative to comparable acquisitions based on EV/EBITDA multiples. However, the deal will also lower LVMH's operating margins initially and increase its financial leverage. Overall, the acquisition seems a strategic fit that improves LVMH's long-term competitiveness, but it also carries increased financial risks.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
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    of 2

    1. The global personal luxury goods industry can be split into “soft” luxury and “hard” luxury.

    What are key


    the categories in each of those segments and how is LVMH currently positioned? How will the
    acquisition change LVMH’s position as well as its competitive advantage? Hint: Think about market
    share, the current categories and markets LVMH is strong in and what Tiffany can add to that. Useful
    sources include 1) Bain research (which can be found on Google) for understanding the definition of
    “soft” and “hard”. 2) Latest data from Passport database for calculating market share (access via your
    university library website, search “Passport” in Databases). Don’t worry about the beauty category for
    now. 3) The deal presentation on LVMH’s Investor Relation website under Publication.

    Soft luxury refers to apparel and footwear, leather goods and accessories (e.g., scarf, hat, eyewear).
    Hard luxury mainly refers to watches and jewellery.

    Based on Passport data at the end of 2018, LVMH currently ranks 1st in the global personal luxury
    market with 11% market share. It is the No.1 player in leather goods (23% market share), No.1 in
    apparel and footwear (7% market share), No.3 in jewellery (8% market share), No.4 in watches (10%
    market share), and No.5 in eyewear (2% market share).

    With Tiffany’s strong No.2 position in global luxury jewellery with 10% market share, post the
    acquisition, LVMH will have 18% of the market, nearly on par with the world largest hard luxury
    company Richemont who has 19% market share in the luxury jewellery category. The deal will also
    strengthen LVMH’s presence in Asia Pacific and North America given Tiffany’s stronger footprint in those
    geographic markets, as shown in below chart.

    Overall, this acquisition is highly complementary to LVMH’s current business and improves its
    competitive advantage in the global personal luxury goods industry from both category and geographic
    perspectives. Tiffany’s vertically integrated supply chain also ensures that the majority of diamonds and
    raw precious metals are obtained through direct sourcing relationships in environmentally and socially
    responsible ways, which enhances LVMH’s competitive advantage in its supply chain.

    2. How is the deal structured and how will it impact LVMH’s leverage (i.e., Net Debt / EBITDA)? Additional
    challenge – how will it impact the WACC? Hint: Look into the deal presentation and press release on
    LVMH’s website.
    The deal is to be paid in all cash. LVMH will finance it by issuing bonds (LVMH-TIF presentation pp7). As
    a result, the deal will increase LVMH’s Net Debt / EBITDA by 1.6x as per LVMH’s guidance.

    Higher leverage will reduce WACC due to cost of debt being lower and more tax shield on interest
    payment. However, higher leverage will also increase the financial risk to LVMH’s shareholders and
    therefore, to compensate for this, cost of equity will go up as well. The final impact on WACC will
    depends on which one has a greater effect.

    3. What’s the valuation for this deal and do you think it is reasonable compared to the last two major
    acquisitions LVMH completed (Dior and Belmond)? And the recent Michael Kors-Versace deal? Hint:
    Think about both absolute and relative measures (EV/EBITDA). Useful sources include 1) deal
    presentations on LVMH’s Investor Relation website under Publication. 2) Google.

    Deal EV EV/EBITDA Source


    LVMH-Tiffany US$16.9 billion 16.6x LVMH-TIF presentation pp2
    LVMH-Dior Euro 6.5 billion 15.6x LVMH-Dior presentation pp2
    (c. US$7.3 billion)
    LVMH-Belmond US$3.2 billion 22.9x Calculated using information on
    LVMH-Belmond presentation pp3
    and 5
    Michael Kors- Euro 1.8 billion 22x Google / BoF
    Versace (c. US$2.2 billion)

    Although the Tiffany deal appears to be significantly more expensive on an absolute basis dollar
    basis, it is rather reasonable when considered on a relative EV/EBITDA basis given Tiffany’s size and
    profitability.

    4. How will the deal impact LVMH's operating profit margin? Hint: Look into the two companies' latest
    annual report / financial results, calculate operating profit margin and compare. Use recurring operating
    profit where available.

    Operating margin = Operating profit (also can be called Earnings from operations, Earnings before
    Interest and Taxes (EBIT)) divided by Revenue.

    • Tiffany 2018 operating margin = US$790.3 million / US$4,442.1 million = 17.8%


    • LVMH 2019 operating margin = Euro 11,504 / Euro 53,670 million = 21.4%

    Given that Tiffany’s operating margin is lower than LVMH’s, the deal will lower LVMH’s margin.

    N.B.: The reason we use recurring operating profit for our financial analysis is because it reflects the true
    underlying performance from everyday ongoing operation.

    5. Do you think this is a good or bad deal for LVMH? There is no right or wrong answer, all comments are
    welcome.

    Positive comments may include: Improved competitive advantage and market position, regional and
    category expansion opportunity, margin improve opportunity, reasonable valuation, etc.

    Negative comments may include: Increased leverage and financial risk, lower margin, expensive deal
    price, etc.

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