This handout picture taken on March 16, 2020 and released by French luxury group LVMH on March 17, 2020 shows workers at the Christian Dior cosmetics and perfume factory in Jean-de-Braye making hand sanitizers to be given for free for Paris' hospitals (AP
LVMH, the luxury goods giant controlled by French billionaire Bernard Arnault that in November agreed to acquire Tiffany & Co. for $135 a share, is considering buying those shares for less on the open market amid a coronavirus-driven slump, according to people familiar with the matter.
LVMH has discussed the idea with Tiffany’s board, which could grant permission for the potential transaction to go ahead after earnings, said the people, who asked not to be identified as the discussions are private. The French group hasn’t made a final decision on whether to go ahead with selective market purchases and is discussing potential legal hurdles to the idea, another person said. Tiffany reported results early on Friday, saying net income fell 8% in 2019.
The unusual step, which could allow the Paris-based group to capture a near 13% discount at recent prices, is an example of how companies are addressing the market rout caused by economic fears around the coronavirus. The move would also underscore Arnault’s commitment to the deal.
Tiffany’s shares traded at around $118 apiece Thursday before Bloomberg first reported the plans. They rose to $125.15 at 3:30 p.m. in New York, valuing the company at about $15 billion.
The New York-based company said it would temporarily close all its stores in the U.S. and Canada, as well as "many other locations.” Tiffany was due to announce earnings on March 23.
A representative for LVMH declined to comment. Representatives for Tiffany didn’t immediately respond to requests for comment.
Deal spreads, the difference in the price at which a company has agreed to sell its shares and the current value of that stock, reflect the market’s confidence that a transaction can overcome regulatory, financing or other, less predictable, hurdles to close. Most spreads on pending deals have widened dramatically in the past two weeks as nervous investors reassess even mergers that look likely to close.
The spread on Tiffany has increased from just 64 cents on Feb. 13 to about $17 earlier today. That means a trader buying Tiffany stock Thursday stood to make that $17 on every share they purchase if LVMH completes the transaction. In buying the shares itself, LVMH effectively saves that same amount.
While the sudden widening of apparently safe spreads reflects the general anxiety gripping the market, it also highlights the pressures facing so-called risk arbitrage hedge funds, which specialize in investing in mergers and acquisitions.
In the past few years quantitative hedge funds willing to invest in already tight deal spreads, using high amounts of leverage to boost returns, have blossomed. The rapid reversal of confidence caused by the current crisis has left several facing margin calls and liquidations, according to people familiar with the matter, adding to the widening.
