By Matthew Dalton and Suzanne Kapner 

PARIS -- Luxury-goods giant LVMH Mo√ęt Hennessy Louis Vuitton SE said Wednesday it was backing out of its $16.2 billion takeover of Tiffany & Co., in a sign of how trade tensions and the coronavirus pandemic have taken the air out of the highflying luxury industry.

LVMH said it no longer wanted to buy Tiffany because the deal was being dragged into the middle of trade disputes between France and the Trump administration. The conglomerate said it had received a letter from the French foreign ministry asking it to delay the acquisition until after Jan. 6, 2021, more than a month after the closing deadline stipulated in the merger agreement.

LVMH said the French government was seeking the delay in response to tariffs Washington has threatened to impose on French goods.

On Wednesday, Tiffany said LVMH was using the letter from the French government as a pretext to back out of a deal that had lost much of its luster since the pandemic changed the economics of the luxury industry. The U.S. jeweler said it has filed a lawsuit in Delaware Chancery Court to enforce the agreement. The entity created to execute the deal is in Delaware.

"We believe that LVMH will seek to use any available means in an attempt to avoid closing the transaction on the agreed terms," Tiffany Chairman Roger Farah said. "But the simple facts are that there is no basis under French law for the Foreign Affairs Minister to order a company to breach a valid and binding agreement."

The deal's unraveling shows how the coronavirus pandemic is reshaping the luxury industry. Brands have long relied on big-spending tourists from China, the U.S. and elsewhere to splurge on handbags and other goods while visiting Paris, Milan, New York and other destinations. That business model is under threat as countries maintain travel restrictions and as perennial travelers shy away from overseas trips.

LVMH's account of the French government's intervention is also a measure of how companies that once remained above the geopolitical fray are becoming chess pieces in trade disputes. France has been at the forefront of countries, including the U.K., Italy and Spain, that are pursuing plans to tax digital companies, such as Alphabet Inc. and Facebook Inc. The U.S. in turn has threatened to impose retaliatory tariffs on any country that implements such a tax, including tariffs on luxury goods. Luxury goods have been targeted by Washington as part of the long-running U.S.-EU dispute over subsidies for Boeing Co. and Airbus SE.

Jean-Jacques Guiony, LVMH's chief financial officer, said it considered the French government's demand a valid, legally binding order. "We have no other choice but to apply this decision," he said.

A French diplomatic official disputed that, saying such a letter from the French government wouldn't be binding on a company.

"In the context of very important international negotiations, the French government is neither naive nor passive when there are objectives we hope to achieve," Gabriel Attal, spokesman for the government of President Emmanuel Macron, said when asked about the letter.

Tiffany is asking the Delaware court to either force LVMH to complete the merger or award Tiffany damages that would be determined during a trial. The agreement allows Tiffany to pay a termination fee of $575 million to walk away from the deal, but LVMH doesn't have the option of paying to back out under the agreement.

The plan to acquire the American jeweler was the biggest acquisition ever attempted by Bernard Arnault, chief executive and controlling shareholder of LVMH. Completed shortly before the coronavirus pandemic threw the luxury goods market into turmoil, the deal was part of Mr. Arnault's ambition to expand LVMH's jewelry business, which was one of the fastest-growing sectors in luxury.

An acquisition of Tiffany would have also marked a large expansion of LVMH's presence in the U.S. luxury market, which was growing strongly before the pandemic hit. Not only has the pandemic hit the U.S. harder than many other countries, American cities have been roiled by protests and civil unrest following the death of George Floyd in police custody. Rioters and looters have targeted shopping corridors while peaceful protesters marched in the streets.

After approaching Tiffany in October 2019 with an all-cash takeover worth about $120 a share, LVMH paid close to Tiffany's all-time-high share price to acquire the company in November 2019. Tiffany's shares have fallen well below LVMH's $135 offer price since the pandemic hit. Tiffany's stock was down about 6% in Wednesday afternoon trading.

Over the summer, Bernard Arnault, chief executive and controlling shareholder of LVMH, began reviewing whether to move forward with the deal, according to a person familiar with the matter. But analysts said the agreement signed between the two companies appeared to give Mr. Arnault little leeway to back out.

In early August, Antonio Belloni, LVMH's managing director, called Mr. Farah to discuss the possibility of walking away from the deal due to a material adverse change in the jeweler's business, according to another person familiar with the situation. A person close to Mr. Belloni said he didn't discuss whether Tiffany had experienced a material adverse change.

A material adverse clause is a standard part of merger agreements a buyer can invoke to walk away from a deal if an event occurs that harms the target before closing. They are rarely enforced, but some buyers have tried to claim the coronavirus pandemic qualifies as such an event. In the spring, private-equity firm Sycamore Partners sought to cancel its purchase of a controlling stake in Victoria's Secret from L Brands Inc. The two sides traded lawsuits before agreeing to scrap the $525 million deal.

Mr. Farah responded that the terms of the deal didn't allow for LVMH to pull out for that reason, the person said. To help reassure LVMH about Tiffany's prospects, the company provided LVMH with a preview of its second-quarter results showing it returned to profitability in the three months ended July 31 on improved sales, the person said. For the quarter, Tiffany's sales fell 29% compared with the same period a year ago. That is better than the 45% year-over-year drop the company reported in the quarter ended April 30.

Nevertheless, Mr. Guiony on Wednesday said LVMH was "not entirely happy" about the way Tiffany was managed during the pandemic -- particularly the decision not to cut the company's dividend despite losing money during the crisis.

By the end of August, LVMH hadn't filed for regulatory approval with the European Union. European regulators reached out to Tiffany's lawyers, asking why it was taking so long, the person said. Tiffany had already obtained regulatory approval from antitrust authorities in the U.S. and China.

LVMH said it received the letter from the French foreign ministry on Sept. 1. On Tuesday, Mr. Belloni called Mr. Farah to inform him of the French government's letter, expressing concerns about a trade war, according to Tiffany's lawsuit. Tiffany informed the White House of the situation later that day, the person familiar with the matter said.

"LVMH has made clear that its real goal is to attempt to renegotiate the merger price to which the parties agreed last November and, barring renegotiation, run out the clock," Tiffany said in its court filing. But "that attempt is entirely improper," Tiffany said in the lawsuit.

Mr. Belloni didn't respond to a request for comment.

Mr. Guiony said LVMH didn't solicit the letter from the foreign affairs ministry, though executives did have discussions with Jean-Yves Le Drian, the French foreign minister, after receiving it. "It came as a total surprise," Mr. Guiony said.

On Wednesday LVMH said Tiffany asked to extend the deadline for the acquisition until Dec. 31 of this year, giving the two sides more time to get regulatory approvals. A person close to Tiffany said the jeweler never asked for a delay beyond the Nov. 24 deadline.

In the six months ended July 31, Tiffany had revenue of $1.3 billion compared with $2.05 billion in the year ago period. It had a net loss of $33 million compared with a profit of $262 million last year. Tiffany has since reopened nearly all its stores and said sales trends were improving in August.

On Wednesday, CEO Alessandro Bogliolo said, "The company has already returned to profitability after just one quarter of losses, and we expect our earnings in the fourth quarter of 2020 will actually exceed the same period in 2019."

Write to Matthew Dalton at Matthew.Dalton@wsj.com and Suzanne Kapner at Suzanne.Kapner@wsj.com

 

(END) Dow Jones Newswires

September 09, 2020 14:57 ET (18:57 GMT)

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