Nov 5, 2019
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Tiffany takeover needs a lot of LVMH polish

Nov 5, 2019

LVMH will need more than Hollywood stardust to extract value from its $15 billion bid for Tiffany & Co. Investors in the jeweller lauded by Audrey Hepburn in “Breakfast at Tiffany’s” are hoping for a higher offer after Bernard Arnault’s luxury conglomerate submitted a proposal worth $120 a share. But the deal will require a lot of polish if it is to make sense for the French company’s shareholders.

The $220 billion owner of Bulgari and Christian Dior is probably the richest suitor in the bling universe. Yet to justify an offer for Tiffany in financial terms, LVMH will have to earn a return on its investment that exceeds the U.S. group’s cost of capital, which Morningstar estimates at 8.6%.

A Breakingviews calculator shows the scale of that challenge. The purveyor of trinkets in iconic blue boxes is expected to lift revenue by less than 1% in the current financial year, according to estimates compiled by Refinitiv, and convert less than 18% of that into operating profit. To justify its offer, LVMH would have to boost Tiffany’s revenue growth to 9% a year over the next five years and expand its operating margin to 24%.

Such a turnaround would exceed LVMH’s own impressive performance. Arnault’s company will expand its top line by 8% a year until 2023, Refinitiv estimates suggest, while its operating margin this year is set to be 21%.

Tiffany shares were trading close to $127 on Monday, suggesting that investors expect a higher bid. But bumping the price to, say, $130 a share would present LVMH with an even bigger challenge. Tiffany’s revenue growth would have to zoom to 11% a year for its new owners to earn a positive return.

Of course, as with previous purchases of iconic brands, LVMH is looking well beyond the next five years. Its shareholders would probably accept that a revamp of Tiffany – which was founded in 1837 - requires sizeable upfront investment, pushing returns into the future. LVMH’s successful turnaround of Bulgari, which it acquired eight years ago, offers some comfort.

Tiffany boss Alessandro Bogliolo may be hoping for a bidding war to lift the shares nearer to the record price of almost $140 that it reached last year. But any other buyer will face the same financial constraints. It will take a lot of sweat to make Tiffany’s jewels sparkle.

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