TIF - Tiffany & Co

[Cigarbutt]

This is one for those adept at picking dollar bills in front of steam rollers.

Disclosure: I've done about 10 or so of such 'deals' with a small favorable outcome in all but i'm not wired for these and fully expect to have one loss eventually wipe out all gains realized over time. If the market enters a withdrawal episode, a high enough degree of conviction may trigger a very small position.

 

LVMH

-wants to buy at 135 and shares trade now at a level corresponding to the previous offer

-have secured financing with favorable terms and pretty much back-stopped by large entities ready to do whatever it takes

-officially reported that they will not use the pandemic to take advantage of the situation...

-is buying this (the brand, the box, even the color) for the long haul (a diamond is forever mentality)

 

The negatives:

-Mr. Buffett has passed on this acquisition (apparently) and bet on the debt in 2009.

      -this objection can be mitigated by the fact that Mr. Buffett does not tend to become intimately (equity) involved when "improvements" need to be made to the business (unlike Mr. Arnault)

-***LVMH may want to play Atlas Shrugged and then we're looking into the abyss, in terms of where TIF could trade under present circumstances

 

A big underlying question is: are we going through a scare, a fundamental SHIFT or somewhere in between?

[ukvalueinvestment]

Can you talk a bit about pricing.  Where is the bid, where was Tiffany trading pre bid, what's risk/reward.  What is fair value for Tiffany.

[John Hjorth]

LVMH Press Release [March 23^rd 2020] :

 

Rumors circulated recently indicating that LVMH would consider buying Tiffany shares on the open market.

 

These rumors lead LVMH to recall that, in accordance with the agreement concluded with Tiffany in November 2019, LVMH is currently committed not to buy Tiffany shares.

[Cigarbutt]

@ukvalueinvestment

First, an admission: when I see your user name, I keep 'seeing' ukuleleinvestment and something tells me that this is not the kind of joke you want to hear.  :)

TIF has a history of irregular earnings and varying market perception about its value. I think the value is worth more in Mr. Arnault's hands (synergies and vision). The typical multiples used (historical and variable) are EV/EBITDA of 12-14 and PE of about 25. I tend to make my money in low end stuff and would not typically pay such high multiples, even in luxury industry stocks. The "fair value" estimate below is based on a reasonable normalized value as could have been perceived by the market before LVMH and CV showed up.

 

-"Rumor" of a bid at 120, Oct 27, 2019

share price before: 98.55

share price after: 122.94

 

-"confirmed bid" at 135, Nov 25, 2019

share price before: 125.51

share price after: 133.25

 

-estimate of FV before "rumor": 80-100

 

"what's risk/reward?": That's what I'm working on now.

 

@John

Is this value investing?  ::)

[John Hjorth]

Cigarbutt & ukvalueinvestment,

 

This appears certainly to be an interesting proposition. Trading today at 121 - 122 right now. I'll need to dig up the TIF/LVMH merger/takeover agreement tomorrow for further study tomorrow, to discuss further in this topic.

[minten]

TIF traded up significantly last week because of a a rumour LVMH was looking to buy shares on the open market. Today LVMH denied they were interested in doing this, so shares traded down again.

 

In general, merger arb spreads have exploded all over these last few weeks. Market seems to think virtually every merger will fail (and who knows, the market might be right). This one looks pretty safe though.

[John Hjorth]

Agreed, minten,

 

It's about reading the agreement with special focus on existing cat flaps related to the evolution in circumstances between now and at the time of the entering into the agreement.

[writser]

-estimate of FV before "rumor": 80-100

 

Of course that is also the estimate of FV before "world going in lockdown". It's probably lower now, right? LVMH is down ~25% in the same timeframe and TIF is probably even more affected.

 

Last week TIF was much more attractive (traded around $110 at some point, or 20%+ upside vs. ~10% now). Unfortunately it wasn't really on my radar at the time (I know, easy to say in hindsight. Who knows if I had pulled the trigger .. ). Rumors are now that Citadel had to liquidate a large position.

 

Still, it's an interesting situation. Arnault is probably not too easily swayed by the short term. And he can cough (no Corona pun intended) up the cash.

 

On the flip side, in the current market a 10% spread isn't that much. Is TIF with 10% upside much more attractive than BREW with 25% upside? Or IOTS with 33% upside? Or RESI, KEM, TCO, GCAP, TECD, CORV, .. ? All reasonable mergers trading with 25%+ upside.

 

Lawyers will have a great time debating whether a pandemic is a just cause to terminate a merger agreement. An interesting read:

 

https://clsbluesky.law.columbia.edu/2020/03/19/coronavirus-is-becoming-a-majeure-headache-for-pending-corporate-deals/

 

And that observation brings us to a final prediction, which our analysis permits us to state with some degree of confidence: If you are an M&A litigator on either the plaintiff or defendant side (and you remain healthy over the next few months), your timing couldn’t be better.

[Cigarbutt]

-estimate of FV before "rumor": 80-100

Of course that is also the estimate of FV before "world going in lockdown". It's probably lower now, right? LVMH is down ~25% in the same timeframe and TIF is probably even more affected.

...

Lawyers will have a great time debating whether a pandemic is a just cause to terminate a merger agreement. A very interesting read:

https://clsbluesky.law.columbia.edu/2020/03/19/coronavirus-is-becoming-a-majeure-headache-for-pending-corporate-deals/

...

The FV that matters is the one you meet when you sell if the deal fails. I assume the deal is closing within 3 or 4 months. Now, based on a few relative comparables (Pandora, Signet and other 'luxury' retailers; LVMH is more resilient), the invisible 'FV' is down 50%+ (using the same time frame). It would be reasonable though (most likely scenario) to assume that market value would gravitate to longer term visible 'FV' of 80-100 + time value within a year or two. If you can live holding TIF for that long.

 

Read the following at your own risk. The article is interesting. Force majeure has its origin in Roman Law but was codified in 1804 French Code Civil (Napoléon was not a complete jerk). The initial fundamental criteria have remained: the event must be 1) unpredictable, 2) uncontrollable (cannot be avoided or mitigated) and 3) external (not the fault of the party). Over time, the sanctity of contracts has been questioned but there's been resistance to exonerate parties although lawyers who can formulate cheesy or colorable arguments can have a field day. One would have to look at the specific documents (content and wording) and I'm not an expert but it seems that LVMH, as a competent party, should have been able to foresee (criteria 1) the possibility of a pandemic (perhaps similar to a severe global recession etc). They could have a case if the pandemic risk was specifically mentioned in the legalese as an inescapable proviso. I doubt it given the tone and content of today's press release.

[Dalal.Holdings]

-estimate of FV before "rumor": 80-100

 

Of course that is also the estimate of FV before "world going in lockdown". It's probably lower now, right? LVMH is down ~25% in the same timeframe and TIF is probably even more affected.

 

Last week TIF was much more attractive (traded around $110 at some point, or 20%+ upside vs. ~10% now). Unfortunately it wasn't really on my radar at the time (I know, easy to say in hindsight. Who knows if I had pulled the trigger .. ). Rumors are now that Citadel had to liquidate a large position.

 

Still, it's an interesting situation. Arnault is probably not too easily swayed by the short term. And he can cough (no Corona pun intended) up the cash.

 

On the flip side, in the current market a 10% spread isn't that much. Is TIF with 10% upside much more attractive than BREW with 25% upside? Or IOTS with 33% upside? Or RESI, KEM, TCO, GCAP, TECD, CORV, .. ? All reasonable mergers trading with 25%+ upside.

 

Lawyers will have a great time debating whether a pandemic is a just cause to terminate a merger agreement. An interesting read:

 

https://clsbluesky.law.columbia.edu/2020/03/19/coronavirus-is-becoming-a-majeure-headache-for-pending-corporate-deals/

 

And that observation brings us to a final prediction, which our analysis permits us to state with some degree of confidence: If you are an M&A litigator on either the plaintiff or defendant side (and you remain healthy over the next few months), your timing couldn’t be better.

 

Yeah, the drop in TIF to 110s was due to Citadel liquidating a departed trader's position:

https://nypost.com/2020/03/20/ken-griffins-fund-citadel-drove-shocking-drop-in-tiffany-shares/

 

LVMH had to work hard to sweeten its offer for TIF (a long, proud history as an American luxury fashion brand). They must be aware that if they back out now, TIF may never be available for them again. I think the odds are in holders of TIF's favor.

 

LVMH already raised significant amt of cash at very attractive terms to take out TIF:

https://www.bloomberg.com/opinion/articles/2020-02-07/louis-vuitton-gets-help-from-the-ecb-for-16-billion-tiffany-deal

 

Two of the five euro tranches were placed at negative yields, meaning investors are paying single A-rated LVMH to borrow money. Arnault’s expectations back in November for yields from the sale of “between 0% and 1%” have been surpassed. Even the 11-year tranche has a coupon of just 0.45%. M&A has never been cheaper.

[Cigarbutt]

For those who speculatively follow, Women’s Wear Daily reported rumors suggesting that LVMH may have second thoughts.

So still speculative but at least the spread has improved.

[fareastwarriors]

LVMH's Arnault mulls ways to renegotiate deal with Tiffany: sources

 

https://www.reuters.com/article/us-tiffany-m-a-lvmh/lvmhs-arnault-mulls-ways-to-renegotiate-deal-with-tiffany-sources-idUSKBN23A2KX

[John Hjorth]

LVMH Press Release [June 4^th 2020].

 

"Wool in mouth" message?

[Dalal.Holdings]

Hope TIF takes the breakup fee and stays as an independent, American brand.

[Cigarbutt]

Hope TIF takes the breakup fee and stays as an independent, American brand.

Do you mean:

-so it can become great again?

-because it should stick to its guns?

[clutch]

I'm also looking to own this one as an independent company if the share price crashes down from this point.

[fareastwarriors]

I'm also looking to own this one as an independent company if the share price crashes down from this point.

 

At what price would this be a buy for you? Sub 100? Sub 80?

[clutch]

I'm also looking to own this one as an independent company if the share price crashes down from this point.

 

At what price would this be a buy for you? Sub 100? Sub 80?

 

Somewhere between? I haven't updated valuation for a couple of years but I was happy to add shares when it was hovering around $90 about two years ago.

[SHDL]

https://www.wsj.com/articles/lvmh-reviews-tiffany-deal-amid-coronavirus-riots-11591284202

 

So it seems that LVMH doesn’t really have the legal right to walk away from the deal but they are hoping to get themselves a better price by claiming that Tiffany is violating the terms of the contract by tripping a debt covenant. Good luck with that...

[John Hjorth]

https://www.wsj.com/articles/lvmh-reviews-tiffany-deal-amid-coronavirus-riots-11591284202

 

So it seems that LVMH doesn’t really have the legal right to walk away from the deal but they are hoping to get themselves a better price by claiming that Tiffany is violating the terms of the contract by tripping a debt covenant. Good luck with that...

 

The whole situation with this hung [<- ?] deal is interesting. I'm sure I'll learn something about Mr. Arnault - his personality and his modus operandi - from it. Some time ago Cigarbutt and I were having fun in the "Tell me a joke..." topic about goats, and Cigarbutt used this expression about Mr. Arnaults personality : "... the subtle intricacies of the wolf in the cashmere coat's personality ...".

 

In short, Mr. Arnault didn't get to where he now is by being nice. He is extremely ambitious. Especially in his early years he was more some kind of corporate raider, where he also lost a few battles [Gucci and Hermes comes to mind]. He is a serial acquirer - a gem collector [<- pun intended].

 

- - - o 0 o - - -

 

Among Danes there exist a phrase used to express lack of trustworthyness at another person : "I wouldn't trade a second-hand car with him/her.".

 

So I've been thinking a bit about if I would trade a second-hand car with Mr. Arnault. Left that line of thinking quite quickly because it appeared highly hypothetical & of no relevance, because :

 

1. He has likely no interest in buying a second-hand car at all [the only second-hand things of interest to him are pieces af art],

2. He has likely no interest at all in a car that I can afford to buy, &

3. If I were to buy his second-hand car, I would likely not be able to without posting our home as collateral for some debt, which I have promised never to do again,

 

because he's not only a yacht owner, in fact he controls the shipyard, where his yacht is built. [ : - ) ]

 

- - - o 0 o - - -

 

Dalal.Holdings has mentioned a break-up fee. I looked it up. It's USD 575 M, and mutual. I would personally be very surprised, if LVMH backs out from here. To me, if the situation evolves to litigation or arbitration, everything can happen. [i'm speculating/guessing.]

[fareastwarriors]

LVMH refrains from renegotiating Tiffany deal, sources say

 

https://www.reuters.com/article/us-tiffany-m-a-lvmh/lvmh-refrains-from-renegotiating-tiffany-deal-sources-say-idUSKBN23C1SH

[Dalal.Holdings]

https://www.wsj.com/articles/lvmh-reviews-tiffany-deal-amid-coronavirus-riots-11591284202

Dalal.Holdings has mentioned a break-up fee. I looked it up. It's USD 575 M, and mutual. I would personally be very surprised, if LVMH backs out from here. To me, if the situation evolves to litigation or arbitration, everything can happen. [i'm speculating/guessing.]

 

FYI from the WSJ article:

 

The merger agreement allows Tiffany to pay a termination fee of $575 million to walk away from the deal, but LVMH doesn’t have the option of paying to back out.

[Cigarbutt]

https://www.wsj.com/articles/lvmh-reviews-tiffany-deal-amid-coronavirus-riots-11591284202

So it seems that LVMH doesn’t really have the legal right to walk away from the deal but they are hoping to get themselves a better price by claiming that Tiffany is violating the terms of the contract by tripping a debt covenant. Good luck with that...

The whole situation with this hung [<- ?] deal is interesting. I'm sure I'll learn something about Mr. Arnault - his personality and his modus operandi - from it. Some time ago in the "Tell me a joke..." topic about goats, ... used this expression about Mr. Arnaults personality : "... the subtle intricacies of the wolf in the cashmere coat's personality ...".

In short, Mr. Arnault didn't get to where he now is by being nice. He is extremely ambitious. Especially in his early years he was more some kind of corporate raider, where he also lost a few battles [Gucci and Hermes comes to mind]. He is a serial acquirer - a gem collector [<- pun intended].

- - - o 0 o - - -

Among Danes there exist a phrase used to express lack of trustworthyness at another person : "I wouldn't trade a second-hand car with him/her.".

So I've been thinking a bit about if I would trade a second-hand car with Mr. Arnault. Left that line of thinking quite quickly because it appeared highly hypothetical & of no relevance, because :

1. He has likely no interest in buying a second-hand car at all [the only second-hand things of interest to him are pieces af art],

2. He has likely no interest at all in a car that I can afford to buy, &

3. If I were to buy his second-hand car, I would likely not be able to without posting our home as collateral for some debt, which I have promised never to do again,

because he's not only a yacht owner, in fact he controls the shipyard, where his yacht is built. [ : - ) ]

- - - o 0 o - - -

Dalal.Holdings has mentioned a break-up fee. I looked it up. It's USD 575 M, and mutual. I would personally be very surprised, if LVMH backs out from here. To me, if the situation evolves to litigation or arbitration, everything can happen. [i'm speculating/guessing.]

So, let's call this educated speculation.

Like always, anything can happen but Mr. Arnault is long-term oriented, likes the color and the box and wants it. It may be reasonable that he tries to lower the bid to 125 or something but the deal is likely to go through.

It's interesting and maybe relevant (financing part) to take a look at the context when he took control (and eventually dismantled despite promises) of the Boussac Group (1981-5). The perilous transformation required essentially the formation of a company (it was mostly a textile company despite the hidden Dior and marketing companies gems) in liquidation carrying a very heavy debt load. Have you taken a look at the financing transactions (war chest) made since February of this year:

https://www.lvmh.com/investors/investors-and-analysts/debt-financing/

If he drops TIF, what would he do with all this cash (even after paying the breakup fee)?

[Cigarbutt]

Tiffany's has amended debt agreements to obtain breathing room on covenants, has been obtaining regulatory approvals (with Europe and Australia to come, in October or before) and has declared its regular dividend today.

Also, related to the value of the luxury brand, a long legal fight with Costco (!) has made some progress recently.

https://www.thefashionlaw.com/tiffany-amp-co-and-costcos-7-year-fight-over-counterfeit-rings-will-be-one-to-watch-in-2020/

https://www.thefashionlaw.com/appeals-court-sides-with-costco-in-21-million-fight-over-counterfeit-tiffany-rings/

FWIW, i would tend to side with Tiffany's if chosen as a jury member but even if they lose the trial on the substance of the case, the fact would remain that the main value of Tiffany's is not what is inside the box but the box itself which is blue, or is it green? or uniquely iconic turquoise?

 

[fareastwarriors]

Tiffany's has amended debt agreements to obtain breathing room on covenants, has been obtaining regulatory approvals (with Europe and Australia to come, in October or before) and has declared its regular dividend today.

Also, related to the value of the luxury brand, a long legal fight with Costco (!) has made some progress recently.

https://www.thefashionlaw.com/tiffany-amp-co-and-costcos-7-year-fight-over-counterfeit-rings-will-be-one-to-watch-in-2020/

https://www.thefashionlaw.com/appeals-court-sides-with-costco-in-21-million-fight-over-counterfeit-tiffany-rings/

FWIW, i would tend to side with Tiffany's if chosen as a jury member but even if they lose the trial on the substance of the case, the fact would remain that the main value of Tiffany's is not what is inside the box but the box itself which is blue, or is it green? or uniquely iconic turquoise?

 

New news or is this from early June?