The Acquisition of Tiffany & Co. by LVMH

Executive Summary

The case study assesses whether the offer by LVMH is enough to acquire Tiffany & Co.

Tiffany & Co. is a company with a reputation of over 180 years and whose share has increased in value in recent years. Tiffany deals in charms and perfumes, among other beauty products. Based on its statement of cash flows, Tiffany & Co. generates an income of USD 4.4 billion. This analysis establishes the cost of capital for acquiring Tiffany & Co. Also, the analysis looks into the company's acquisition premium and computes Tiffany's value using the market capitalization approach and the enterprise value approach. Also, the analysis determines the acquisition premium of the acquisition. Incidentally, the analysis determines whether the acquisition deal benefits both companies.

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Analysis

The two companies, LVMH and Tiffany & Co., are leading Luxury Companies and world-class luxury jewellers, respectively. LVMH is based in France and active in six sectors, including wines and spirits, perfumes and jewellery, and retailing. On the other hand, Tiffany & Co. is based in America, and it is a leading jewellery and speciality retailer. In 2018, Tiffany & Co. had a turnover of EUR 4 billion, and if the acquisition succeeded, Tiffany & Co. would be the biggest acquisition deal for LVMH.

Cost of Capital

The cost of capital for the acquisition of Tiffany & Co. is equivalent to the cost of capital of Tiffany & Co. which in this case is 8.6% (Vaughn et al., 2022). The cost of capital for LVMH is equivalent to the cost the company will incur to raise capital to run the operations of Tiffany & Co., and that is why the cost of capital is equivalent to the cost of capital of its subsidiary. However, following the reputation of LVMH, the company’s subsequent cost of capital may reduce because its management approach and operational tactics are different from the management approach of Tiffany & Co.

Acquisition Premium

The acquisition premium is the difference between the estimated value of a company and the amount of money paid to acquire the company. In the case of LVMH and Tiffany & Co., the estimated value of Tiffany & Co. is USD 15.827 billion. The value was derived by using the enterprise value approach. Tiffany & Co. had 121500000 outstanding shares. At that time, each company share was valued at USD 128. LVMH offered USD 135 per share to acquire the company. Therefore, the company paid over USD 7 per share, equivalent to a premium of 5.47%.

The Value of Tiffany & Co

The value of Tiffany & Co. can be computed using the enterprise valuation approach because it considers the company's debt and the cash and its equivalents. As such, the true value of Tiffany & Co. is USD 15.827 billion. The direct market capitalization of the company is USD 15.509 billion, which translates to USD 128 per share. The enterprise value considers the debt and cash, leading to USD 130.26 per share. As such, the true value of Tiffany & Co. is USD 130.26 per share.

Acquisition Decision

The premium of 5.47% is small, and therefore, LVMH should consider purchasing the company. The acquisition will come with more benefits that will cover the cost incurred. For instance, Tiffany & Co. has an established brand, and its products are already consumed. As such, LVMH will not incur extra costs to sell its subsidiary's products. Incidentally, the acquisition is strategic for LVMH because if the competitor buys the company, then LVMH will have lost a reasonable market share.

References and LVMH: How Much Is Enough? Sage Business Cases, DOI: https://doi.org/10.4135/9781529794052.

Vaughn, C., Powers, S., keratitis, R., Hall, K., Marsh, J., Richardson, W. (2022). Tiffany & Co.