LVMH, the world’s leading luxury group, recently backed out of its planned $16 billion engagement with Tiffany. However, despite this setback, both Wall Street and Tiffany itself are confident in the jewelry company’s ability to thrive independently. In a recent call with employees, Tiffany’s CEO, Alessandro Bogliolo, reassured them that the company is well-equipped to withstand the collapse of the deal. This sentiment is echoed in the company’s share value, which has actually increased by 16% despite the challenges posed by the COVID-19 pandemic and the potential loss of LVMH’s support.

On Thursday, Tiffany’s stock closed at $114.36, a significant increase from the $98.55 price prior to news of the takeover deal emerged in October. This demonstrates that investors still see value in Tiffany despite the impact of the pandemic on sales and the uncertainty surrounding the failed deal. Robert Burke, the founder of a luxury retail consulting firm, attributes Tiffany’s appeal to its strong reputation and desirability among consumers.

The collapse of the deal was prompted by the French government’s request for a delay in the transaction’s closure, which LVMH cited as its reason for pulling out. Initially, Tiffany’s executives were excited about the acquisition as they saw it as the culmination of their efforts to revive the brand. However, concerns about Tiffany’s long-term prospects in an extended economic downturn have arisen, especially if governments increase taxes and property prices continue to plummet.

Tiffany has filed a lawsuit in Delaware, accusing LVMH of intentionally delaying antitrust compliance to sabotage the deal. This proposed acquisition would have been the largest-ever in the luxury industry and would have allowed Tiffany to expand globally, invest in store renovations, and develop new collections without the need for quarterly earnings reports to shareholders. It would have also aided LVMH in expanding its presence in the U.S. market and supporting the growth of its jewelry and watch business.

Industry insiders suggest that LVMH may enter into negotiations with other companies, such as Richemont or Kering, for potential acquisitions in the U.S. market. Analysts anticipate that if negotiations were to resume, LVMH would reduce its bid for Tiffany shares to $108. Despite the current economic challenges, the possibility of further mergers and acquisitions could bolster Tiffany’s future prospects.

Tiffany and other standalone luxury brands face significant challenges during this unprecedented time. The global pandemic has caused economies to plummet and brought international tourism to a halt, making it difficult for brands to adapt and thrive on their own. Tiffany has attempted to attract a younger customer base through more affordable offerings and has heavily invested in its online business while focusing on expanding in the Chinese market. However, without the backing of a larger conglomerate like LVMH, the company may find it more challenging to weather economic headwinds.

In recent years, large luxury conglomerates have generally outperformed standalone luxury brands due to their ability to diversify portfolios and mitigate risks associated with changing trends and consumer preferences. These conglomerates, such as LVMH, have also made substantial investments in marketing and advertising, especially on social media platforms. In contrast, brands like Burberry and Salvatore Ferragamo have struggled to compete in this evolving landscape.

When LVMH initially acquired Tiffany, its chairman, Bernard Arnault, praised the brand as an American icon with a strong brand image and a recognizable blue-egg color. However, LVMH has now countersued Tiffany, accusing it of mishandling the effects of the pandemic. LVMH argues that Tiffany underperformed compared to similar brands in the first half of the year and questions the company’s decision to pay dividends despite facing a net loss of $33 million and a 34% decline in revenue.

Overall, although the collapse of the LVMH deal poses challenges for Tiffany, the company remains optimistic about its future. Its reputation and history make it appealing to investors and consumers alike. While the current economic climate presents uncertainties, the possibility of alternative acquisition opportunities, along with Tiffany’s efforts to adapt and innovate, may enable the company to navigate these challenges successfully.

Useful links:
1. CNBC article on companies walking away from deals during COVID-19
2. Reuters analysis of LVMH’s legal battle with Tiffany