Tiffany Case

Page 1 LVMH MOËT HENNESSY: LOUIS VUITTON SE'S B ID FOR TIFFANY & CO. On October 28, 2019, LVMH Moët Hennessy - Louis Vuitton SE (LVMH) put in an unexpected offer to acquire Tiffany & Co. (Tiffany) for US$14.5 billion, or $120 per share, a 20 per cent premium over Tiffany's closing price the previous day . This hostile offer, which was not initiated by the target company, was a specialty of LVMH's chief executive officer (CEO) , Bernard Arnault. Over the years, LVMH, a luxury goods empire, had been aggressively trying to expand its wealthy product portfolio, and acquiring Tiffany would be a great way to materialize this expansion plan. The CEO of Tiffany, Alessandro Bogliolo, would need to decide whether this acquisition was right for the company, and, if so, whether the initial bid price was acceptable. With the luxury industry including other large conglomerates such as Richemont and Kering, was LVMH the right acquirer and was the price right? TIFFANY & CO. In 1838, Charles Lewis Tiffany founded Tiffany as a stationery and fancy goods emporium. In 1878, Tiffany began its journey into diamonds, acquiring one of the rarest diamonds at the time and thus launching its famous line of engagement rings. Tiffany sold jewellery, sterling silver, china, crystal, stationery, fragrances, water bottles, watches, personal accessories, and leather goods. Its famous rare diamonds were regularly worn by Hollywood A-listers, while its more mainstream products were appropriate gifts for countless occasions (e.g., anniversaries, graduations, and engagements). Tiffany's signature duck-egg blue box, known as " the little blue box, " was recognized worldwide as the sign of a loving gift. Tiffany had gained a strong brand image and customer loyalty, and had become a first thought for customers when considering a gift. Unlike most luxury goods companies, Tiffany had a stronghold on the millennial segment, an important customer base for future growth. Recently, Tiffany had undergone a tumultuous leadership turnover, with CEO Frederic Cumenal having been fired in February of 2017 due to Tiffany's financial difficult ies. He was replaced by interim CEO Michael Kowalski until July 2017, when new CEO Alessandro Bogliolo was appointed. Bogliolo was the former CEO of Sephora, a subsidiary of LVMH. With this overlap, Bogliolo would likely be a good fit under the LVMH umbrella, given his previous experience working with the conglomerate in a CEO role. Tiffany's recent financial performance ha d not been exemplary. Although Tiffany's stock was trading at $98.55 per share in October 2019, it had dipped as low as $80.57 per share in August of the same year. Tiffany had a sizable amount of fixed assets that it could use as collateral. The S&P had rated its debt at BBB+. Based on historical data, Tiffany 's beta was estimated to be approximately 1.25. Tiffany's market debt-to-equity ratio is about 8.7%; that is, debt is 8% and equity is 92% in its capital structure. More of Tiffany 's recent financial information is provided in Exhibits 1-3. LVMH Louis Vuitton Malletier started his career as an apprentice trunk maker in Paris, where he birthed the idea for a flat-top stackable suitcase, and invented his famous blue-and-white-striped canvas trunk. The Second World War brought tumultuous times for LV, leading the family to bring in a new business-oriented family member to lead the company, Henry Racamier. He began to acquire companies such as Givenchy and Veuve, and aggressively grew LV's revenues in the late 1900s. He also took the company public o n both

Page 2 the French Bourse and New York Stock Exchange. As part of his acquisition strategy, he agreed to merge with Moët Hennessy to form the Moët Hennessy Louis Vuitton (LVMH) group in 1987. The current CEO of LVMH, Bernard Arnault, entered the luxury goods scene in 1984, with the purchase of Boussac Saint- Frères, which included Dior. He was known as the "terminator," a ruthless and profitability - driven leader. Racamier had approached Arnault to help bolster his position with the Moët and Hennessy families amid the merger. Instead, Arnault attempted a hostile takeover, eventually pushing first Racamier and subsequently other members of the Vuitton family out of LVMH. This takeover was extremely bitter and predatory, and led French officials to rewrite the laws around takeovers. Amid these circumstances, Arnault became the CEO of LVMH in 1989. Arnault was known to have carried out hostile and unprecedented bids over his years as CEO at LVMH. For example, a hostile bid for Gucci had ended poorly, with Gucci pursuing an alliance with another company to avoid the takeover, with the takeover ultimately being blocked by the French authorities. A huge media spillover had followed, with Gucci defaming Arnault for his predatory hostile behaviour. Similarly, LVMH had a long dispute with Hermès after Arnault stealthily acquired a large stake in Hermès, which he subsequently had to forfeit due to the Hermès family warding off the takeover. Despite several hostile acquisitions having turned sour, Arnault brought together more than 70 brands, and completed one of the most aggressive acquisition strategies ever. His immense success in growing LVMH during his tenure as CEO landed him the position of third-richest person in the world, according to Forbes . LVMH currently consisted of 75 different brands (e.g. Dior, Bulgari, Hennessey, etc.) in six main segments, well known for its luxurious and expensive collections. LVMH considered each brand to be a "house" in its collection. LVMH categorized its houses as "high -end ready-to-wear, fine products, " with each building on LVMH's specialized legacy and focusing on an exquisite calib re. LVMH was family-run, with CEO Arnault succession planning within the family with several of his children on the executive team. The company was listed on the Euronext Paris, which was France's stock market, with an approximate market capitalization of € 213 billion. LVMH was three times larger in revenue than any of its competitors with 2019 sales of € 53.67 billion, up 15 per cent from the previous year, and profit from recurring operations of € 11.5 billion, also up 15 per cent year over year. Its inherent size advantage, allowed it to access capital at relatively cheaper prices and to have more funds available for investments. The S&P had rated its debt at AA, higher than Tiffany's credit rating. Its beta of 0.98, significantly lower than Tiffany's, highlighted the diversified nature of its conglomerate business model. Select segment and consolidated financial performance data for LVMH is provided in Exhibits 4-6. THE LUXURY RETAIL INDUSTRY Tiffany operated in both the luxury jewellery segment and the aspirational jewellery segment. Within the luxury jewelle ry segment, Tiffany's main competitors include d Cartier, De Beers, Bulgari, and more. These companies competed with Tiffany on premium products — those products typically valued at more than $2,000 and aimed at a higher-class consumer base — such as engagement rings, high-quality gold and silver products, and gemmed products. These companies competed on quality, prestige, perceived influence, and brand value. Their marketing efforts typically relied on relationships with celebrities and other high-net- worth clients who wore their products at major events. Within the aspirational jewellery segment, Tiffany competed against more mainstream brands such as Pandora, Swarovski, and more. These companies competed with Tiffany on more affordably priced products such as necklaces, bracelets, and rings that typically ranged from $150 - $1,000. These products

Page 3 were targeted at the aspirational consumer, typically a middle-class individual who aspired to dress and purchase like an elite consumer. These companies competed on perceived value or prestige and quality for value, and vied for being seen as "trendy" by consumers. Although LVMH competed against many of the publicly traded luxury retail firms, its jewellery-specific competitors included Harry Winston, Cartier, Van Cleef, and Tiffany. LVMH already operated a sizeable watches and jewellery segment and the potential acquisition of Tiffany could lead to cannibalism of revenue generated by its existing products. While the jewellery industry as a whole was growing at 7 per cent each year, there was a trend toward more mainstream jewellery brands enjoying a higher growth trajectory than luxury brands. Tiffany, which offered both mainstream and luxury products, enabled LVMH to enter a jewellery segment it had not seen before. Large conglomerates dominated the sector, owning many brands within many luxury segments; however, this growth was largely propelled by Chinese consumer spending, a market where Tiffany lacked LVMH's strong presence. See Exhibits 8 and 9 for data on publicly traded retail firms, with some of these focused on luxury products including jewellery. CURRENT ECONOMIC CONDITIONS Economic slowdown concerns persisted as the S&P 500 Index continued its longest bull run in history, leading to expectations of a downturn that would last for several years. The US Federal Reserve had cut interest rates three times to 1.5-1.75 per cent most recently (see Exhibit 7 for recent bond yield data), which signalled the government's concern over an impending recession . Global gross domestic product (GDP) growth was expected to rise from 2.9 per cent in 2019 to 3.3 per cent in 2020 and 3.4 per cent in 2021. In the United States, consumer spending had been steadily increasing and reached an all-time high of $13.410 trillion, leading to healthy GDP growth year after year. This growth was largely driven by an increase in retail sales, which grew 3.8 per cent in 2019. However, one fear was the rise in consumer debt levels, which was propelling the increase in consumer spending. US consumer debt reached $14 trillion in 2019, exceeding the debt level in the 2008 recession. As Chinese consumers were a large driver for growth in the luxury industry, it was encouraging to see the Chinese economy continually achieve significant, although slowing, growth. China' s GDP growth was 6.6 per cent in 2018 and 6.1 per cent in 2019, with the GDP growth rate expected to decrease slightly in the coming years. POTENTIAL ACQUISITION Arnault, an acquisition visionary, chose Tiffany as LVMH's next target because of its fit with the firm's current houses. Tiffany, a company with a long heritage and history in the American market, could add to the "specialized legacy" that Arnault w as focused on building. Arnault's view for Tiffany was an opportunity to tap into the millennial market that had thus far been relatively untouched by LVMH. Although LVMH focused on high-end luxury, Tiffany had created a unique space where high-end offerings and middle-tier offerings could coexist. Tiffany was thus able to maintain an expensive and luxurious feel, fitting in perfectly with the other LVMH houses, while simultaneously executing a mass-market approach with the middle class. Tiffany's vertically integrated supply chain gave LVMH access to all its manufacturing facilities and its more than 321 stores worldwide, including its flagship store in New York City.