Tiffany & Co. (NYSE:TIF) drew an unsolicited $14.5 billion bid from LVMH Moet Hennessey (OTCMKTS:LVMUY), the luxury conglomerate, and traders held a party.
When the smoke cleared, Tiffany sported a market cap of $15.67 billion, well ahead of the LVMH bid.
There’s either a bidding war in the offing, or some people just got snookered.
The $120 price on the LVMH bid looked like diamonds in the shop window on Oct.24, when TIF shares were trading at about $99. On Oct. 29, that price looked more like pastry and coffee.
A more important question is what the bid means. Does LVMH see a new boom in luxury goods coming? Or are they just trying to roll up the ultra-luxury category on the cheap?
What’s TIF Is Worth
At a price of almost $130 per share, Tiffany’s is overvalued. Even before the LVMH bid came in, its price to earnings ratio was higher than the market. Now it’s over 27.
The company is on-pace to deliver revenue of $4.4 billion for the current fiscal year. As with most retailers, this ends in January, after they finish the Christmas returns. The company is consistently profitable, but it has not been growing, with fiscal 2019 sales less than 10% ahead of 2016.
Investors bought Tiffany’s for the dividend, a 58 cent per-share payout the company could easily afford. At $90 per share, that was a yield of over 2.5%, better than you can get on a 30-year bond. At its current price the yield is closer to 1.8%, barely more than you get on the 10-year.
Shares in LVMH sport a similar profile, with one key difference. Their price has been rising as the company continues to buy every luxury brand it can find – Reposi, Belmond, even Christian Dior, which cost over $13 billion two years ago. It now has 70 high fashion brands under its wing.
LVMH sees its brands the way billionaires see sports franchises. Their rarity makes them valuable. Customers will pay the price to be associated with the brand. It’s less about supplying billionaires than multi-millionaires who want others to think they’re billionaires.
Still, the strategy has worked. LVMH sales were 30% higher in 2018 than in 2015. Tiffany would boost that another 10%.
The Bigger Picture With TIF Stock
Tiffany’s board will evaluate the LVMH proposal and has advised shareholders to sit tight for now.
LVMY likes to strike when its target is cool.
Tiffany’s value in August was lower than it was five years previously, and insiders have been selling. Analysts were calling it fairly valued at $84.
Despite the China slowdown and Hong Kong protests, LVMH beat estimates on its third quarter results. Tiffany’s did not.
This means the company is unlikely to find a “white knight” with which it can fight off the LVMH offer. Its options are limited. LVMH isn’t going to bid against itself.
The Bottom Line on Tiffany Stock
There are analysts who insist a higher bid is coming. Cowen & Co., which had lowered its price target on the stock to $115 last year, now claims it could be worth $160-$180 per share.
Kering (OTCMKTS:PPRUY), with a market cap of $70 billion, and Richemont (OTCMKTS:CFRUY), with a market cap of $43 billion, are being eyed for rival bids.
But Bernard Arnault, who controls LVMH, didn’t become Europe’s richest man and a centi-billionaire by being stupid and overpaying. If the bidding gets too rich, or Tiffany’s digs in too fiercely, he can walk away.
If you have been sitting on Tiffany’s shares, your ship has just come in. Don’t miss the boat.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
