- December 7, 2019
- Posted by: Ramkumar
- Category: Mergers And Acquisitions
LVMH Acquisition Of Tiffany & Co Overview
Commonly expressing, organic growth is more economical than growth by other means like M&A (mergers and acquisitions). However, M&A has a position in the expansion of a firm, especially those that are sizable players in their businesses. Though high-priced, the benefit of M&A-oriented growth is twofold. For beginners, it provides for a quick impact as faced to the sluggish toil that organic growth usually is. Another, it influences the elimination of a competitor as opposed to operating on organic growth that’s intended at competing against the said competitor. It ‘s with these principles in mind, likely that the LVMH acquisition of Tiffany & co is all about.
LVMH’s deal for Tiffany underlines two significant bearings: the luxury sector is on a continued prevailing burst with little indication of abating, and consolidation is necessary to success. This trend gets exhibited in stock prices. Though political turbulence has wrinkled demand in Hong Kong, one of the largest luxury markets, the deficit is closed by increasing demand in China.
LVMH Acquisition Of Tiffany & Co – Deal rationale
The deal between LVMH and Tiffany is as simplistic as they get. LVMH has accepted to acquire the latter in an all-cash venture evaluating it at $135 per share. This price estimates Tiffany at $16.3 billion on an equity basis and draws a significant premium over where shares traded earlier. The premium over the previous day’s trading price develops out to about 7.6%.
LVMH has not given details on the interest rate and other loan terms except the following: the business will draw three distinct sets of debt to execute this deal. It is utilizing an $8.5 billion bridge loan, and a $5.75 billion CP back-up, and a 2.5 billion euro revolving credit facility to complete the sale. This financing venture is necessary because, as of the end of its recent reporting period, LVMH had cash and cash equivalents of just 4.61 billion euros. At the current exchange rate, this illustrates to approximately $5.08 billion, though the company does want to have cash on hand as part of its normal day-to-day operations.
The exact price spent on Tiffany is very high. If one applies tiffany’s latest quarterly results, its EBITDA spread out to $1.02 billion. Including net debt on its books now of about $346.7 million, the firm’s EV (enterprise value) equals $16.66 billion (contrasted to the $16.9 billion used in the press release). That extends out to an EV/EBITDA of about 16.3. Although Tiffany is an excellent jewelry label, investors should not acknowledge this a discounted price.
Let us evaluate the business from a different perspective: from the viewpoint of it’s market cap/operating cash flow. In examining the firm’s past financial returns, we noticed that its revenue has vacillated in a rather tight range for at least the past five years. Between 2014 and 2018, this range was $4 billion to $4.44 billion. Across that equivalent time frame, operating cash flow was further unstable, going haphazardly amidst a low of $531.8 million last year and $932.2 million the year before. These variations can be due to timing adjustments in working capital that can control operating cash flow, and 2018’s working capital differences were a tad challenging for the business when we use the average operating cash flow margin across the five years. After using that figure (17.3%) to 2018’s results to capture a further pragmatic “normalized” operating cash flow for last year of $768.5 million, the market cap/operating cash flow multiple of the transaction reaches out to 21.2, which is very expensive.
Transaction at a price
If Tiffany had a stronger performing story over the prior few years, the amount spent on it might be more sensible. At the same time, the deal increases the revenues of LVMH’s Watches and Jewelry division. Executives particularly emphasized this in their latest investor presentation.
In the past three years, LVMH has witnessed impressive operating results. While Tiffany’s revenue over this time grew 11%, LVMH’s increased by 24.5%. Its Watches and Jewelry sales grew just a bit more moderate at 18.9%. From a profit aspect, the position is even more beneficial. Over this period, LVMH’s cumulative recurring profits surged 42.4% while its Watches and Jewelry sales witnessed its earnings grow 53.5%, and, in the last fiscal year, Watches & Jewelry saw a 17% profit margin. The total net income for LVMH over this time grew by 57%.
Besides, LVMH needs to discover means to add value to its Watches and Jewelry business; it requires to do it in a particular market: the US. The US region of the company produced only 9% of its sales in the US. On the contrast, 44% of all revenues made by Tiffany last year happened from the Americas. Through acquiring an excellent jewelry player with a sizable lump of its sales devoted to the Americas, LVMH has access to a significant (but reasonable competing) market.
This transaction further provides the company with the capacity to cross-sell in additional markets. LVMH makes about 47% of its Watches and Jewelry revenue from Asia (including 15% from Japan), while Tiffany produces 43% of its revenue from Asia (including 15% from Japan as well). LVMH has a significantly more massive grip over the European market than Tiffany does, with 29% of that divisions’ revenue arising from there (including 6% in France) opposed to the 11% that Tiffany claims.
This access presents the company the strength to quickly extend specific product lines into other regions or to concentrate on cutting costs to generate synergies by decreasing overhanging corporate costs, making supply chain efficiencies, physical store reductions where feasible.
LVMH Acquisition Of Tiffany & Co – Takeaway
It is challenging to get full hold over whether the transaction will eventually be deserving of it. While the price spent for Tiffany is extraordinary, there should be the potential for synergies, notably revenue-related ones. This deal generates some level of skepticism for shareholders. However, Tiffany’s investors will presumably end up accompanying away with the better end of this deal, LVMH is not securing an utterly irrational leap here.