Seeking Alpha

Tiffany Opens Its Books As LVMH Opens Its Wallet

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About: LVMH Moët Hennessy - Louis Vuitton, Société Européenne (LVMHF), TIF
by: Malcolm Spink, CFA
Malcolm Spink, CFA
Event-driven, arbitrage, long/short equity, hedge fund manager
Summary

Tiffany moves higher following the announcement of improved offer from LVMH.

LVMH gains access to confidential due diligence.

A higher offer and a higher stock price increase downside risk in the event of a deal breaks.

Introduction

Immediately following the announcement by LVMH (OTCPK:LVMHF) of the unsolicited proposed takeover of Tiffany & Co. (TIF), the market speculated on the possibility of a higher offer. That initial bid of $120 was first increased on November 20, as LVMH raised their offer to $130. Finally, on November 24, LVMH again increased the offer to $135 and won approval from the Tiffany board. This latest increase granted LVMH confidential access to Tiffany's books in order to complete their due diligence. Following this announcement, we take a closer look at this deal as a potential candidate for merger arbitrage investment.

This analysis will focus on the following key areas:

  • Expected completion date
  • Selected conditions necessary for merger completion
  • Potential risk/return

For those wishing to learn about the strategic rationale and future of Tiffany & Co. as part of the LVMH group, we refer the reader to the many excellent articles to be found on the Seeking Alpha website under the TIF ticker.

Deal Background

The table below summarizes the key updated offer details.

Target Stock Name Tiffany & Co.
Target Stock Ticker TIF
Acquirer Stock Name LVMH
Announcement Date October 28, 2019
Expected Completion Date June 30, 2020
Offer Price $135.00
Payment Method All Cash Deal

Source: Merger Arbitrage Limited

In a filing dated November 27, Tiffany has stated that they:

... are seeking regulatory approval in a number of jurisdictions, including the U.S., European Union and China.

The U.S. approvals include HSR expiration and CFIUS clearance. In addition to this, shareholder approval is also required as is customary. What we found most interesting, however, was the due diligence issue. LVMH has made three offers to Tiffany and only now have been granted access to their accounts. Many a seasoned merger arbitrageur would have balked at investing in deal where this was not already completed.

Rumors had circulated of a bid for Tiffany & Co. for some time but it was on Sunday, October 27, that the market was first given confirmation of LVMH's takeover approach. Indeed, the stock price and volume information in the following immediately prior to the announcement indicate positions were already being taken pending an announcement.

Date Open High Low Close Volume
28-Oct-19 127.65 130.4 125.74 129.72 22,290,900
25-Oct-19 98.3 103 97.16 98.55 3,665,000
24-Oct-19 92.84 98.12 92.84 97.67 3,558,000
23-Oct-19 90.86 92.58 89.74 92.43 1,724,500
22-Oct-19 89.69 91.01 88.57 90.96 1,479,200
21-Oct-19 89.25 90.05 89.02 89.57 963,300

It is important to note this initial rise from $90 to $98 pre-announcement. We will use a floor price of $90 in our subsequent calculations.

Polishing the Information

Tiffany & Co. was the best performing cash merger arbitrage stock last week. The stock rose significantly on Monday following the increased bid from LVMH for $135 per share.

ChartData by YCharts

Following the 6.61% rise in the stock to $133.80, the deal is now offering an investment return of 0.90%. However:

The company and LVMH have agreed that the company may continue to pay its ordinary dividend. While the Board must declare such dividends, the company has no reason to believe that it will not continue to do so.

Using the expected closing date in the middle of next year (from the table above), we can assume three dividend payments will be declared and paid at the current rate of $0.58. This increases the rate of return to 2.2%. We can annualize that rate using the same closing date to give a return of 3.8%.

Early closing may, of course, increase this annualized return, but, at the same time, could potentially reduce the number of dividends paid and thus reduce the return. The next ex-dividend is December 19. Therefore, should the deal close 1 month early, the expected June dividend is omitted and the annualized return becomes 3.6%. This return now needs to be compared with the potential downside. Using a floor price of $90, we calculate the current maximum loss to be just under 32%.

On the other hand, there is always a possibility of a delay in closing. It's a small possibility, but SAMR regulatory approval is required. Timelines for which are difficult to predict because of the lack of transparency in the evaluation process. A closure delay of 3 months, however, would only reduce the annualized return to 3.1% assuming the stock maintains the current dividend.

What could potentially derail this deal is the ongoing due diligence. Should LVMH find something untoward in the accounts, they will be able to walk away from the deal. However, like regulatory approval, we believe this is unlikely. LVMH should have the capability to understand Tiffany's business and initial groundwork and analysis will already have been completed. Any problems encountered up to this point would already have been made public or, at least, would not have resulted in two increased offers.

A Rough Diamond?

The probability of the deal failing looks rather slim. Even so, a 32% downside for a roughly 3.5% upside (annualized) are the bottom line numbers. On this basis, we rank this merger arbitrage spread just below the middle of the pack for investable cash merger arbitrage deals.

What could be an issue is a deal delay due to regulatory issues. Although as demonstrated, the dividend can help stabilize the return. Merger arbitrageurs who may not often encounter dividend payments should be aware of the tax treatment of these dividends in their own particular geographical location. In addition, this deal could be included as a diversifier in an existing portfolio of deals which may have higher concentrations in other industries/geographical locations.

Even though we believe the possibility of this deal falling apart is extremely low, we do not consider this deal to offer a sufficient return worthy of an investment at this time. We shall continue to monitor this merger and report as necessary in our weekly merger arbitrage performance report.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Merger arbitrage trading is not without risks. This strategy, although accessible to individuals as well as professionals, should be thoroughly understood BEFORE investment capital is put at risk. To assist the reader, "evergreen" content such as "how-to" & introductory guides, a reading list and much more including a list of the largest cash merger arbitrage spreads currently available can be found at the Merger Arbitrage Limited website associated with the author of this article.