A Moet Hennessy L.V. (LVMH)-Tiffany takeover-a flawed deal for customers.

Implications: An LVMH (Moet Hennessy, L.V.) takeover of Tiffany would probably be a good deal for US shareholders, as well as, its domestic competitors. Whether it’s so good a deal for Tiffany, ‘Je ne sas pas’.

Analysis: Takeovers are about profit, not about compatibility. If the suitor can finance the deal and the price is high enough, the deal probably should be done. After all, shareholders invest in a company because they expect dividends, increased earnings per share, and stock appreciation; something an acquisition neatly accomplishes.

If the buyout results in a new public company, investors can choose to either keep their new shares and trust new management to increase company value or sell and reinvest in another company that they think is a superior investment.

That’s all a bit pedantic, but the point is most buyout offers are probably in the best interest of shareholders, but that can't be said of management. Most management teams have a vested interest in discouraging a buyout. Call it 'looking out for the best interest of shareholders' if you want, but its all about job security since existing senior management doesn't usually survive the deal.

With respect to a Tiffany deal, there are two questions shareholders have to answer. First, how much and second, do I want to hang around and invest in the new company? With respect to how much, the market is setting a wide range of values on luxury jewelers. For instance, Blue Nile is selling for about 97X earnings. A luxury diamond Internet retailer, the company has less than 1% of the US diamond market and less than an 8% EBITD. Its CEO wants to grow the business to about 3.0% market share over the next 6 to 7 years.

In contrast, Tiffany is an established brand with a global presence, a sophisticated supply chain, and an emerging Internet presence. Using Blue Nile’s valuation the company ought to be worth $188 per share. A bit high, but it makes my point. Now selling at about 98% of its 52 week high, whatever valuation LVMH assigns to the company, 2.5X, 3.0X, 3.5X sales,…etc., it’s probably in Tiffany’s shareholders best interest to encourage the board to make a deal, since its problematic whether current management can increase fundamental performance enough to justify the higher multiple.

The second question, do current investors stay in? The answer to that question isn’t clear, well maybe it is? As often as not, most buyouts fail to materially improve the value of either the target company or the buyer when viewed 24 months after the fact. In this case, investors won’t really know since Tiffany’s financial performance will be buried in the consolidated financial statements of LVMH, a French conglomerate, which doesn’t issue separate statements on its subsidiary holdings. For those interested, LVMH is sold as an ADR on the OTC exchange.

From an industry perspective, the buyout would probably be to the advantage of Tiffany’s competitors. Here is my reasoning. Management change is all but certain. New management will be more aggressive, open more stores, and in the process dilute brand value. Whether there are any new designers that have the equivalent appeal of Elsa Peretti or Paloma Picasso that have been overlooked remains to be seen. Successful designer brand jewelry is a rarity in the industry and a plethora of minor designer names isn’t like to drive sales as much as it fragments brand image.

Then there's the difference between managing capital expenditures in a conglomerate and an stand alone company. Long term, Tiffany’s growth will probably be constrained by it association with LVMH. There are also competitive considerations. Tiffany competes for luxury goods customers with most of the LVMH European subsidiaries. Whether such a combination would result in stronger competition for the industry as a whole or less isn’t clear, but I think the balance would favor the companies from the European Union. If so, Tiffany would be weaker both in the US and overseas and that would be good thing for US competition.

A LVMH takeover would probably be a good deal for US shareholders, as well as, domestic competitors. Whether it’s so good a deal for Tiffany, ‘Je ne sas pas’.