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Bram de Haas
Bram de Haas
Articles (458)  | Author's Website |

Tiffany and Louis Vuitton About to Settle

Another review of the interesting opportunity with Tiffany and Louis Vuitton

October 29, 2020 | About:

LVMH Moët Hennessy Louis Vuitton SE (LVMHF) previously signed a merger agreement to buy Tiffany & Co. (TIF) at a sum of $135 per share. After the Covid-19 crisis began, the French luxury conglomerate tried to call off the deal, which tanked the stock.

In an article about the topic last month, in which I made a case for the deal eventually being completed despite this stumbling block, I surmised:

"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."

In the meantime, a court date has been set for early January, but if this gets into the courtroom, Louis Vuitton's Chairman and CEO Bernard Arnault (who is the richest person in France) could be deposed. That could turn into an embarrassing event because there's a lot of confusion around a letter sent by a French minister asking LVMH to delay the merger (which makes up the core backing of the company's argument that it can delay or dissolve the merger agreement). As Bloomberg reported in September:

"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."

In addition, if LVMH waits, it would be on the hook for a December dividend amounting to an extra $0.58.

The Wall Street Jouranl reported on Wednesday that the deal is getting done at a lower price as a settlement and the parties will then forego the trial. Supposedly, the new price will be $131.50. There is a chance Tiffany shareholders will also pick up the December dividend.

Because of these favorable developments, Tiffany's share price has increased and it currently trades at $129.70. That's up 14% from the price it traded at last month, but that's not that surprising because the fundamentals of the deal have changed. Last month, my model looked like this:

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

Note that the expected annualized return is significantly below the spread. That's because I assumed the deal would fall apart in about 25% of cases and there were still 83 days remaining.

However, I kept updating my model, and after yesterday and today's run-up, the deal only offers a 5.5% annualized expected return.

Name acquirer Name target Target ticker Acquirer ticker gross spread expected annualized return Days remaining until close estimated closing probability Break price Cash bid
LVMH Moet Hennessy Louis Vuitton SA Unsponsored ADR Tiffany & Co. TIF LVMUY 1.61% 5.55% 103 99.82% 60.00 131.5

I've assumed a buyout price of $131.50. If the deal breaks, I think the stock could fall back to $60. Closing the new deal should take about 90 days and I've factored in a 99% closing probability. All the necessary regulatory approvals are in and LVMH looks fairly desperate to settle this. I'm not surprised arbitrage traders are buying into Tiffany.

However, I exited the stock before the publication of this article because I think the return offered through the spread is too low. I'm getting to a 5.5% expected annualized return. There's something to be said for a high probability the deal closes, but there is also a chance LVMH will only take a limited amount of time to agree on another deal and close.

The faster you make money, the better of course, and if the deal closes quickly now, that's very important and greatly increases the rate of return. I'm not certain enough of this deal to keep holding on at the 5.5% predicted return. That's why I've sold out and will wait for a better opportunity in this name or elsewhere. I'll leave some money on the table in case it closes successfully. That's fine because I can eliminate a lot of risk here while having captured most of the upside.

Disclosure: author has no position any more in TIF [Tiffany]:

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About the author:

Bram de Haas
Bram de Haas is managing editor of The Special Situations Report and Founder of Starshot Capital B.V.

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