financial analysis

CASE STUDY LVMH & TIFFANY MERGER

Akhil Narayanan | Aaditya Singh | Anishek Bhutani | Samaneh Seyedi | Rokhsareh Shabani

Louis Vuitton Moet Hennessy

About LVMH

French MNC and corporation which specializes in luxury apparel and other products.

Family run organization, LVMH aims to ensure the long-term sustainability of each of its group companies

Home to 75 prestigious houses spread among six separate industries.

Christian Dior SE, the parent firm of LVMH has a controlling 40.9% shares and 59.01% of the voting rights.

SWOT Analysis

STRENGTHS

LVMH is strongly associated with quality.

Endorsements by top celebrities.

Good returns on capital investments.

Strong brand portfolio

Successful track record of innovating.

WEAKNESSES

The profitability are below the industry average.

There are gaps in the product range sold by the company.

Investment in R&D is below the fastest growing players in the industry.

OPPORTUNITIES

Stable cash flow offers opportunities for expansion in neighbouring product categories.

Government’s green drive opens up the potential for all state and federal government agencies to buy Louis Vuitton goods.

Expansion of Online Sales.

Market innovations would dilute the competitive edge of competition which will allow Louis Vuitton to increase its profitability relative to other competitors

THREATS

The biggest threat that luxury good face today is that of counterfeit products in the market.

Rising raw material cost can pose a threat to the Louis Vuitton profitability.

Increasing trend toward isolationism in the American economy can lead to similar reaction from other government thus negatively impacting the international sales.

FINANCIALS

Valuation Ratios

P/E Ratio: A higher P/E proportion shows that financial specialists are happy to follow through on a higher offer cost today as a result of development desires later. The high different demonstrates that financial specialists expect higher development from the organization contrasted with the general market. A high P/E doesn't really mean a stock is overvalued

Debt/EBITDA ratio is the comparison of financial borrowings and earnings before interest, taxes, depreciation and amortization. A higher Debt/EBITDA means that the company is highly leveraged and may have more difficulties to pay back its debts. On the other hand, by using the EV/EBIT ratio we can realize how much cash the company has in hands. The higher EV/EBIT the less amount of debt for that company and lower level of risks for the investors.

EV/EBITDA is the enterprise value of a company divided by its earnings before interest, taxes, depreciation and amortization. The high/ low the ratio means that the company is overvalued/ undervalued. Typically, EV/EBITDA values below 10 are seen as healthy.

LVMH Moet Hennessy Louis Vuitton SE earns better returns on investment than it takes to raise capital required for the expenditure.

A company that expects to continue to generate positive excess returns on new investments in the future will see its value increase as growth increases.

Inference

Both dividend growth model and total payout model are analytical strategies adopted by financial experts and analysts to navigate among the available investment options. The specific purpose of these two models is to estimate the fair share value of stocks.

The calculated share value of LVMH is noticeably lower than the current share value of €350.00.

The stocks for LVMH are currently 26.5%(TPM) - 65.8%(DGM) overvalued.

TIFFANY & Co.

About Tiffany

Arguably the world’s most iconic jewelry brand

Founded in 1837 by the jeweler Charles Lewis Tiffany.

The company operates retail outlets in the Americas, Asia-Pacific, Japan, Europe and the United Arab Emirates.

Through Tiffany and its other subsidiaries, the Company is engaged in product design, manufacturing and retailing activities.

Tiffany’s merchandise offerings include an extensive selection of jewelry as well as timepieces, home and accessories, and fragrances

SWOT Analysis

STRENGTHS Reliable suppliers – It has a strong base of

reliable supplier of raw material thus enabling the company to overcome any supply chain bottlenecks.

Successful track record of developing new products – product innovation.

Good Returns on Capital Expenditure – TIFFANY & CO. is relatively successful at execution of new projects and generated good returns on capital expenditure by building new revenue streams.

Strong Free Cash Flow – TIFFANY & CO. has strong free cash flows that provide resources in the hand of the company to expand into new projects.

WEAKNESSES There are gaps in the product range sold by the

company. This lack of choice can give a new competitor a foothold in the market.

The profitability ratio and Net Contribution % of TIFFANY & CO. are below the industry average.

Not very good at product demand forecasting leading to higher rate of missed opportunities compare to its competitors.

Limited success outside core business – Even though TIFFANY & CO. is one of the leading organizations in its industry it has faced challenges in moving to other product segments with its present culture.

OPPORTUNITIES New trends in the consumer behavior can open up new

market for the TIFFANY & CO. It provides a great opportunity for the organization to build new revenue streams and diversify into new product categories too.

New customers from online channel – Over the past few years the company has invested vast sum of money into the online platform. This investment has opened new sales channel for TIFFANY & CO. In the next few years the company can leverage this opportunity by knowing its customer better and serving their needs using big data analytics.

The new technology provides an opportunity to TIFFANY & CO. to practices differentiated pricing strategy in the new market. It will enable the firm to maintain its loyal customers with great service and lure new customers through other value oriented propositions.

THREATS Rising raw material can pose a threat to the

TIFFANY & CO. profitability.

The demand of the highly profitable products is seasonal in nature and any unlikely event during the peak season may impact the profitability of the company in short to medium term.

Imitation of the counterfeit and low quality product is also a threat to TIFFANY & CO.’s product especially in the emerging markets and low income markets.

Shortage of skilled workforce in certain global market represents a threat to steady growth of profits for TIFFANY & CO. in those markets.

FINANCIALS

By comparing these ratios between LVMH and Tiffany, we can see that Tiffany is doing better and merging the two companies is a great opportunity for both sides. LVMH can have a better market share in the US and

Tiffany can be improved in the millennial’s eyes and Asian and European market, as LVMH and Bulgari acquisition proved right.

Tiffany earns higher return on investment than required to raise the capital required for the investment. A company like Tiffany that expects to continuously generating positive surplus

returns on new investments will see its value increase with the increasing growth.

Inference

The purpose of the dividend growth model and total payout model valuations is to determine if a stock is overvalued or undervalued.

As we can see in the first model, dividends are growing at a rate of 6.85 % (Calculated from ROA) which is a bit high to use for estimating the share value due to the COVID-19 situation.

Calculated fair value of Tiffany’s share price is 54% lower than its current $129.30 trading price. As in the second model, share value is estimated $87.88.

Post Merger Analysis

SYNERGY

A synergy is any effect that increases the value of a merged firm above the combined value of the two separate firms. Synergies may arise in M&A transactions for several reasons, such as cost savings due to operational efficiencies or revenue upside due to more productive use of assets.

• Financial Synergy arises from the improved efficiency of financing activities and is primarily linked to a reduction in the Cost of Capital.

• Operational Synergy is achieved through the improvement of operating activities, such as reduced costs from Economies of Scale.

Operation Synergy

The Merger between LVMH and Tiffany is a type of Functional Integration

Merger will help LVMH to establish themselves as a leader in high end Jewelry industry

Luxury jewelry business enjoyed a 7% increase in sales last year to about $20 billion.

This bodes well for the category in which Tiffany competes and will result in more Revenue for LVMH and Tiffany.

LVMH’s hold in Europe can help Tiffany to improve their presence.

Financial Synergy

LVMH Tiffany Combined

Inputs Risk-Free Rate 0.650% Risk Premium 6.000%

Beta 0.94 1.09 0.95

Pre-tax Cost of Debt 2.4% 2.4% 2.4% T ax rate 26.9% 21.4% 26.6% Debt/Capital ratio 9.3% 9.4% 9.3%

Revenues 59,611.0 4,424.0 64,035.0 EBIT 12,399.0 729.0 13,128.0

Pre-tax return on capital 15.7% 17.8% 15.8% Reinvestment Rate 71.0% 65.0% 70.7% Length of growth period 5 5 5

Output Cost of Equity 6.3% 7.2% 6.3% After-tax cost of debt 1.8% 1.9% 1.8% Cost of capital 5.9% 6.7% 5.9%

After-tax return on capital 11.4% 14.0% 11.6% Reinvestment rate 71.0% 65.0% 70.7% Expected growth rate 8.1% 9.1% 8.2%

Value of firm PV of FCFF in high growth 14,017 1,072 15,072 T erminal value 229,858 13,307 241,571 Enterprise value 186,837 10,697 196,319

Value of Synergies Value of firms (standalone) 197,534.1 Value of firms (combined) 196,318.6 Value of synergy (1,215.4)

Financial Synergy Valuation

MERGER CREATE A POSITIVE 1.2 BILLION SYNERGY

As seen from the valuation tiffany is in great shape and has a fair debt to EBITDA ratio of 1.66 and ROA of 12.46%. There is good balance of debt to cash and debt to equity.

CONCLUSIONS

THE ACQUISITION WILL INSTANTLY MAKE

LVMH A MAJOR PLAYER IN HARD LUXURY AND

RAMP UP COMPETITION.

TIFFANY WITH ITS VERY HIGH BRAND VALUE IN LUXURY

JEWELRY INDUSTRY ARE AN IDEAL FIT FOR

LVMH PORTFOLIO.

THE MERGER REPRESENTS A FUNCTIONAL

INTEGRATION THAT WILL CREATE A

POSITIVE OPERATING IN THE FROM OF

INCREASED REVENUE AND REACH.

MERGER OF TWO COMPANIES WILL

RESULT IN POSITIVE FINANCIAL SYNERGIES