By Matthew Dalton, Noemie Bisserbe and Suzanne Kapner 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 11, 2020).

PARIS -- LVMH Mo√ęt Hennessy Louis Vuitton SE blamed Tiffany & Co. for the unraveling of its $16.2 billion takeover, saying the deal was no longer valid because the jeweler had been mismanaged during the coronavirus pandemic.

The criticism of Tiffany expands on LVMH's initial rationale for calling off its biggest acquisition ever. On Wednesday, LVMH said it was abandoning the deal because of trade tensions between France and the Trump administration. LVMH, owner of Louis Vuitton, Dior and dozens of other luxury brands, said it received a letter from France's foreign minister that LVMH considered a legally binding order to delay the acquisition past the merger's completion date.

On Thursday, LVMH said Tiffany's first-half results and its outlook for 2020 "are very disappointing, and significantly inferior to those of comparable brands of the LVMH Group during this period."

The company added, "LVMH will be therefore led to challenge the handling of the crisis by Tiffany's management and its Board of Directors."

LVMH said the mismanagement of Tiffany during the crisis meant the company had suffered a material adverse event, which under the merger agreement would allow LVMH to walk away from the deal.

A material adverse clause is a standard part of merger agreements that allows buyers to back out if an event occurs that harms the target before closing. Delaware courts, which have jurisdiction over the Tiffany acquisition, have only once before allowed a company to back out of a deal by invoking such clauses.

A Tiffany spokesman declined to comment. On Wednesday, Tiffany sued LVMH in a Delaware Chancery Court, saying the French luxury-goods company was using the foreign minister's letter as a pretext to get out of a deal that had been signed before the coronavirus pandemic threw the luxury-goods industry into turmoil.

LVMH's criticism of Tiffany came as officials in the French government disputed part of LVMH's initial explanation for backing out of the deal.

The letter from French Foreign Minister Jean-Yves Le Drian was only a request and not binding on LVMH, a French diplomatic official said. Mr. Le Drian sent the letter without coordinating with France's finance and economy ministry, which is leading the trade negotiations with the U.S., French officials said. The completion of LVMH's acquisition is irrelevant to the trade talks between the U.S. and France, one French official close to the negotiations said, adding that the government shouldn't play a role in protecting LVMH's interests.

Tiffany released an English translation of Mr. Le Drian's letter that it said LVMH had provided to the jeweler. The translated letter, which was addressed to LVMH Chairman and Chief Executive Bernard Arnault, says France is planning "to take measures in order to dissuade the American authorities" from placing tariffs on luxury goods and other French products in early January. Earlier this summer, the Trump administration threatened the tariffs in retaliation for France's decision to levy a tax on digital giants such as Facebook Inc.

"In order to support the steps taken vis-a-vis the American government, you should defer the closing of the pending Tiffany transaction until January 6, 2021. I am sure that you will understand the need to take part in our country's efforts to defend its national interests," the letter concludes.

An adviser to LVMH said the translation was accurate. Mr. Le Drian's office didn't respond to a request for comment.

LVMH faces long odds convincing a court in Delaware that Tiffany has suffered a material adverse event. Delaware courts have only once before held that such an event has happened. That was in 2018 in a deal involving a pharmaceutical company, Akorn Inc., that was found to have committed extensive violations of U.S. safety regulations at its plants after a German pharmaceutical company agreed to buy it.

Tiffany has asked the court in Delaware either to enforce the merger or award Tiffany damages.

U.S. lawyers who aren't involved in the case, said LVMH would have a hard time arguing that Tiffany was mismanaged during the pandemic.

"The Delaware courts have held that changes in business circumstances don't constitute a material adverse change," said James Rosener, a partner with the law firm Troutman Pepper. "Stuff happens in business and as long as it's not permanent and sustained, it doesn't constitute a material adverse change."

If Tiffany prevails in court, LVMH could face damages in excess of the $575 million termination fee that Tiffany was allowed to pay to walk away from the deal, Mr. Rosener said.

Private-equity firm Sycamore Partners sued Victoria's Secret parent L Brands Inc. in April, arguing the retailer had violated the terms of their merger agreement by closing the lingerie brand's U.S. stores, furloughing most of its workers and skipping April rent payments during the height of the pandemic. L Brands countersued. The two parties eventually agreed to scrap the deal.

On Thursday, LVMH cited as evidence of mismanagement Tiffany's decision to pay its full dividend throughout the pandemic. For the six months ended July 31, Tiffany's sales fell 37% and it lost $32.7 million, though sales improved and it returned to profitability in the second half of that period.

"While Tiffany's sales and profits have fallen, its performance has held up reasonably well compared to other parts of the luxury market," said Neil Saunders, a managing director with research firm GlobalData PLC.

For the first half of LVMH's fiscal year, sales fell 38% at its jewelry and watch business, which posted an operating loss of 17 million euros, or about $20 million, for the period. LVMH's overall profit for the first half was $522 million, down sharply but still buoyed by strong sales at Louis Vuitton, Dior and its cognac brand Hennessy.

LVMH also said Thursday it plans to seek approval for the merger from the European Commission, the European Union merger regulator, despite insisting that the merger cannot happen. That move aims to refute one of the arguments Tiffany made in its lawsuit: that LVMH was dragging its feet in obtaining regulatory approvals as it searched for ways to get out of the deal.

"The filing in Brussels will take place, as expected, in the following days and this is simply the result of the planning fixed by the European Commission, about which Tiffany is completely aware," LVMH said. "It is legitimate to expect this authorization will be obtained in October."

Write to Matthew Dalton at Matthew.Dalton@wsj.com, Noemie Bisserbe at noemie.bisserbe@wsj.com and Suzanne Kapner at Suzanne.Kapner@wsj.com

 

(END) Dow Jones Newswires

September 11, 2020 02:47 ET (06:47 GMT)

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