Luxury Institute News

January 15, 2013

Tiffany Deal Whispers Buoy Value After Earnings: Real M&A

By Tara Lachapelle and Cotten Timberlake
January 14, 2013

In the eye of the investor, Tiffany & Co. (TIF)’s blue-boxed gifts are so alluring to potential suitors that not even the worst earnings stretch in at least a decade has put a dent in its valuation.

Even though the $7.6 billion company has missed profit estimates in four straight quarters and said last week that analysts’ fiscal 2014 projections were too high, the jewelry seller fetches 18.6 times earnings, according to data compiled by Bloomberg. That’s only 0.4 point lower than the multiple in March, when the shortfalls started, as takeover speculation helps support the shares, Ariel Investments LLC said.

LVMH Moet Hennessy Louis Vuitton SA (MC), PPR SA and Cie. Financiere Richemont SA could all boost their earnings by adding the company to their current stable of luxury brands, according to ISI Group and the Luxury Institute. Ariel says a buyer would have leeway to expand Tiffany in the U.S., Asia and Europe. A purchase at current prices would be the biggest of a retailer since Coles Group Ltd. more than five years ago, data compiled by Bloomberg show.

“Sooner or later someone will make a run at Tiffany,” Howard Ward, the chief investment officer for growth equities at Gamco Investors Inc., wrote in an e-mail. Gamco, which oversees about $37 billion, owns shares of the company. “It is a trophy property,” he added. “There are some obvious foreign luxury brand companies that would be interested.”

Swatch Group AG today said it agreed to buy the Harry Winston watch and jewelry brand for about $1 billion, adding a luxury label in the Swiss watchmaker’s biggest acquisition ever. Shares of Tiffany advanced 1.6 percent to $61.25 today.

Takeover Speculation

Mark Aaron, a spokesman for New York-based Tiffany, said the company doesn’t comment on speculation, when asked about the retailer’s takeover prospects. Chairman and Chief Executive Officer Michael Kowalski said in a 2011 interview with the Financial Times that Tiffany has been the subject of deal speculation “probably since we went public in 1987.” He added that his shareholders would be “best served” by the company remaining independent.

Representatives of LVMH, PPR (PP) and Richemont declined to comment.

Tiffany shares plunged 4.5 percent, the biggest drop in six weeks, on Jan. 10 when the company said earnings for the fiscal year ending this month will be at the low end of its forecast after holiday sales growth slowed in the Americas and Asia. Tiffany also projected earnings in the fiscal year ending in January 2014 of about $3.39 to $3.49 a share, compared with the $3.80 average of analysts’ estimates, data compiled by Bloomberg show.

Not Suffering

The company had already missed analysts’ income forecasts for four straight quarters, the longest stretch in at least a decade, the data show. Still, Tiffany’s price-earnings ratio hasn’t suffered much, only falling to 18.6 from 19 on March 19, the last close before its first profit shortfall. The valuation has held up even as Tiffany’s market capitalization dropped from last year’s peak of $9.3 billion.

The Tiffany brand may be alluring to potential acquirers, according to Tim Fidler, a Chicago-based money manager at Ariel Investments, which oversees about $5 billion including the retailer’s shares. In the luxury jewelry industry, Tiffany has the best-known brand among affluent consumers surveyed by the Luxury Institute. Despite falling short of earnings projections since early last year, the company’s fiscal 2013 revenue is forecast to be $3.8 billion, up $1.1 billion from three years earlier, data compiled by Bloomberg show.

Tiffany’s Consistency

“There aren’t many companies in the public markets today on the retail side that you can argue have all the positive attributes with the consistency that Tiffany has demonstrated,” Fidler said in a phone interview. “A lot of the big, European houses would love to own a brand of this type.”

Tiffany said this month that it signed a 20-year agreement to keep selling jewelry by Elsa Peretti, which accounts for about 10 percent of its sales. The accord lets Tiffany retain exclusive rights to the designs, which include “Diamonds by the Yard” and iconic heart- and bean-shaped pendants.

By renewing the deal, Tiffany removed an impediment that could have deterred suitors from considering a purchase of the company, Omar Saad, a New York-based analyst at ISI, wrote in a Jan. 8 note. He said Tiffany “would be a highly attractive asset to the large luxury conglomerates,” and argued that LVMH, PPR and Richemont could all boost earnings by purchasing it. Milton Pedraza, the CEO of the Luxury Institute, a New York- based research and consulting firm, agreed that those three European companies could fuel growth with Tiffany.

High Ranking

“Tiffany continues to have a high brand ranking and prestige,” Pedraza said. “Is it an interesting acquisition opportunity for somebody? Yes, presuming they will do something better and more interesting with it.”

Francesco Trapani, head of Paris-based LVMH’s watch and jewelry unit, said in November that he expects more consolidation in the industry. While the world’s largest maker of luxury goods always has “a window open on M&A,” the company won’t pay “stupid prices,” Trapani said. LVMH bought Bulgari SpA, the Italian jewelry maker, in 2011, and it also sells products including Louis Vuitton bags and Dom Perignon champagne.

PPR of Paris is reorganizing to focus on luxury, sports and lifestyle brands as it seeks to lift sales to 24 billion euros ($32 billion) by 2020 from 12.2 billion euros in 2011. The owner of the Gucci brand has said acquisitions will account for about 20 percent of that goal.

Coles, Wesfarmers

Richemont, the second-biggest luxury goods company, owns brands including Cartier and Van Cleef & Arpels.

A deal for Tiffany at current prices would be the largest takeover in the retail industry since Wesfarmers Ltd. purchased Coles for $15.8 billion in 2007, according to data compiled by Bloomberg.

Because Tiffany’s management knows it’s running an “iconic” brand, it may command a takeover price higher than acquirers are willing to pay, said Brian Yarbrough, a St. Louis- based analyst for Edward Jones & Co. Tiffany shares would be trading above $90 if they were meeting their historical relationship to forecast profit, he said. The company, which ended last week at $60.28, may seek something similar in a sale, he said.

“For a public company, it’s going to be hard to pay that kind of a premium and have it not be dilutive,” Yarbrough said in a phone interview. “Management is going to be very hesitant to sell down here when the business is struggling and not firing on all cylinders. There are reasons why buyers could be interested, but it’s all going to come down to price.”

‘Very Few’

The most likely buyers are the global luxury conglomerates that would buy Tiffany for strategic reasons and that “can afford to pay the most,” said Oliver Chen, an analyst at Citigroup Inc. in New York.

Tiffany is “an extremely attractive asset as an American brand,” Chen said. “They are one of the very few,” he added. “There is an opportunity for incremental product innovation, and Tiffany has an extremely attractive global presence and global awareness.”

Ariel’s Fidler estimated that Tiffany’s value to a buyer is in the “high $70s to low $80s,” based on past acquisitions by strategic buyers in the industry, a discounted cash flow analysis and the current valuations of its peers.

“Obviously if someone is interested in the company, much like management, you always want to listen,” Fidler said. “There’s enormous value at this company and it’s not hard to get to a number substantially higher than the current stock price for a potential transaction.”


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