The French government, it appears, is unable to refuse Bernard Arnault anything. The French luxury goods group LVMH, of which Arnault is chief executive and chairman, had been regretting its agreed purchase of the famous American jewellers Tiffany after the Covid epidemic and lockdown dented the trading performance of both companies. Now the French group has controversially pulled out of the deal after the French Ministry of Foreign Affairs helpfully wrote a letter to the company calling on it to defer the deal in order to 'defend [France's] national interests'.
While it is true that the French state has a long habit of helping its 'national champions', never has a government gone so far in its support of a private group, to the point of getting its diplomatic service to intervene in this way. Yet in order to rescue LVMH from its predicament the French government has become involved in what is a purely private stock market and commercial matter.
The flagship French group already seems to have had unfettered access to France's secret services and police (see Mediapart's article here). Now it appears as if LVMH has performed some form of merger with France's diplomatic corps to serve its own interests. As a result of LVMH's decision Tiffany has said they will take legal action against the French firm, which has in turn said it will countersue.
It was on Wednesday September 9th that LVMH announced that it was no longer intending to proceed with the 16.9 billion dollar friendly takeover of Tiffany that had been agreed in November 2019. The luxury goods group said that it was pulling out on the orders of the French government after receiving a letter from the French foreign minister asking them to defer their takeover of Tiffany “in the national interest”.
“This is a huge affair which could degenerate into an affair of state,” said one business veteran in Paris. “A government has never got involved in such manoeuvres before. First of all, because they don't have the right: the state can't stop Bernard Arnault or anyone at all from buying a private business. Secondly, they've acted like amateur crooks. This story can't end well.”
The letter sent by Jean-Yves Le Drian to Bernard Arnault on August 31st shows the level of that amateurism. The original letter has not been made public, but Tiffany has published the English translation they were handed by LVMH. In it the French foreign minister says: “...[T]he American government has decided to implement an additional customs duty on the import of certain French goods, in particular goods in the luxury sector, in reaction to France adopting a digital services tax...”
It continues: “France considers these measures legally objectionable, in view of the rules of the World Trade Organization, in particular the General Agreement on Trade in Services, and intends, together with its European partners, to take measures in order to dissuade the American authorities from putting these tariff sanctions into effect.
“Consequently, and because the implementation of these tariffs may affect France’s external relations, for which my department is responsible, proposed investments by French companies in sectors that could be subject to such sanctions must be reevaluated in light of this new context...”
At the end the foreign minister hammers home the key point, stating that LVMH “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.”
This letter immediately raises a host of questions. Why did the Ministry of Foreign Affairs feel the need to address such a warning to LVMH? Had there been any discussions beforehand, informal or otherwise, with representatives of the luxury goods group? Had the Ministry of Foreign Affairs given the same advice to other French groups working in the United States? These and other questions have been sent to the ministry, so far without response.
The government's official spokesperson, Gabriel Attal, brushed the issue aside when questioned last week after a regular meeting of ministers in Paris. “Jean-Yves Le Drian is best able to speak for himself in the letter that he himself signed,” said Attal. “What I can tell you is that against a backdrop of international negotiations the government is neither naïve nor passive … there are discussions with a certain number of partners. Jean-Yves Le Drian will return to this subject in detail.”
In the meantime the foreign minister's letter was the get-out clause LVMH had been hoping for. At last they had a reason, an indisputable 'force majeure' event, to pull out of the agreement they had signed with Tiffany back in November 2019. All they had to do was obey the French state's instructions. So on September 4th 2020 an LVMH board meeting formally took the decision: they would indeed pull out of the deal. In a statement published on September 9th the group said: “After a succession of events which undermine the acquisition of Tiffany & Co, the Board of LVMH met to review the situation relating to the contemplated investment in light of these recent developments.
“The Board learned of a letter from the French European and Foreign Affairs Minister which, in reaction to the threat of taxes on French products by the US, directed the Group to defer the acquisition of Tiffany until after January 6th, 2021. Furthermore, the Board noted Tiffany & Co.’s requested to extend the 'Outside Date' in the Merger Agreement from November 24th to December 31st, 2020.
“As a results of these elements, and knowledge of the first legal analysis led by the advisors and the LVMH teams, the Board decided to comply with the Merger Agreement signed in November 2019 which provides, in any event for a closing deadline no later than November 24th, 2020 and officially records that, as it stands, the Group LVMH will therefore not be able to complete the acquisition of Tiffany & Co.”
Events could not have turned out better for the group. For having announced last November's marriage of the century in the world of luxury goods amid some fanfare, LVMH did not want – no longer wanted – Tiffany. Or at any rate, LVMH did not want to buy the iconic American firm at the price it had agreed last year.
What had changed was the arrival of the Coronavirus epidemic, the lockdown and the resulting economic crisis that followed. The luxury goods group discovered that, contrary to its expectations, it was not immune to the effects of Covid-19 and the lockdown. Its two main areas of growth – China and duty free sales at airports – were massively hit by the shutdown of economic life in the first half of this year. The group's revenues fell by 28% and its net profits were down 84% to 522 million euros. Not even the financial crisis of 2008 had had such an impact on the group.
Tiffany had also had a tough time, with net sales down 45% in the first quarter of 2020 and 29% lower in the second quarter. Its stock market value fell by 15%. The question of whether to go ahead with the purchase of the American jeweller at a huge price then became a running issue. Yet when questioned about its intentions over the summer, LVMH said it was still planning to go ahead with the deal.
'Are you seriously suggesting that we procured this letter?'
Yet, as the Financial Times reported, behind the scenes the group was constantly seeking to renegotiate the terms of the deal agreed with management at Tiffany. Was the contract written in such a manner that it allowed no changes? That would be strange for a group such as LVMH which is known for its extreme legalistic approach. Were the renegotiation proposals not enough to satisfy Bernard Arnault? Did the French group refuse to pay compensation and interest for backing out of the deal? What is clear is that, until the timely letter arrived from the country's foreign minister, LVMH was still bound by its November 2019 agreement to purchase Tiffany.
“We believe that LVMH will seek to use any available means in an attempt to avoid closing the transaction on the agreed terms,” Tiffany & Co chairman Roger Farah said when he heard of the French group's decision. The American firm points to the fact that LVMH had not even completed all the anti-trust formalities with the European Union over the deal, even though last year the French group insisted this would not be a problem.
“You must be joking. Are you seriously suggesting that we procured this letter? I don't even want to answer that question,” said LVMH's finance director Jean-Jacques Guiony at a press conference to announce the end of the deal, when a journalist asked him if the group had sought the state's help. Yet that suspicion exists and could well grow. Citing a “person familiar with the [French] government’s thinking”, the news agency Bloomberg claims that Bernard Arnault first sought help from Bruno Le Maire, the minister of finance, who reportedly declined to intervene. The LVMH boss is then said to have approached the foreign minister Jean-Yves Le Drian. A LVMH spokesperson called these “malicious and totally unfounded allegations”.
Could this completely unprecedented intervention by the Ministry of Foreign Affairs have taken place without the Élysée itself being informed? “Impossible” according to several people with knowledge of the workings of government. Though we have no further information at this stage, some observers are even minded to see Jean-Yves Le Drian as having simply carried out orders from the Élysée. Emmanuel Macron and his wife Brigitte are very close to the Arnault family. And the billionaire has benefited from a number of special favours. The silence so far from the government, the Ministry of Foreign Affairs and the Finance Ministry on this affair only help to fuel such suspicions.
The doubts are further heightened by the fact that the methods chosen by the foreign minister indicate a total lack of legal and diplomatic rigour. These failings may well be the result of a certain level of improvisation because of the rush, but they are nonetheless breathtaking as this level of the state. In fact, the state does not have the power to break an agreement in private law, especially a sale, unless it can invoke a public interest clause or force majeure. But where is the public interest or force majeure in this case? Do Louis Vuitton handbags or Moët Hennessy champagne really fall under the category of higher interests of the state, to the point where France needs to involve its diplomacy? Do all the state's resources really need to be put at LVMH's disposal because it is caught up in a bad deal that it risks overpaying for? Simply asking these questions show how ridiculous the government's position is.
As for the risk of a trade war and American reprisals, Bernard Arnault did not need a letter from Jean-Yves Le Drian to keep him informed of events across the Atlantic. He has better contacts with President Donald Trump than any French minister. Thanks to his links with Thomas Barrack, founder of investment firm Colony Capital and a close Trump ally, Arnault was one of the first business leaders – the first French one, at least – to meet Trump after his election.
Since then the two have been in quite regular contact. In October 2019 Donald Trump formally opened a Louis Vuitton handbag factory in Texas. Praising the fact that luxury goods were being “made in America”, the US head of state then said that he had excluded cognac and champagne from the list of products that might get extra taxes slapped on them – French produce has been at risk of higher import duties for the last 18 months – because they are the flagship products of LVMH which creates jobs in the United States.
Meanwhile the French government's slapdash support for the group opens the door to a major legal battle. After LVMH announced it was breaking the deal, Tiffany lodged a lawsuit at Delaware Chancery Court - the leading American venue for business litigation – against the French group for breaking the deal. LVMH has said it will countersue in a likely costly and lengthy legal affair which has got off to a bad start for the French group. However, this kind of situation does not usually overly worry Bernard Arnault who has long been used to court cases and complex legal affairs. Moreover, it is not out of the question that the LVMH boss will make a new bid for Tiffany, though at a significantly reduced price.
The French government is in an even worse situation. By defending the interests of LVMH without any precautions or ambiguity it has put itself in a weak position against the Trump administration. The latter has already realised that it now has a new means of applying blackmail and pressure.
This case could also have some unwelcome side effects. Given that the French state has merrily trampled all over commercial and stock market law, some Tiffany or LVMH shareholders might turn their focus on it and claim damages and interest for having meddled in this private contract. That would be the icing on the cake: in effect the French public would have to pay out because this government wanted to come to the rescue of Bernard Arnault who, not so long ago, wanted to take Belgian nationality.
The French Ministry of Foreign Affairs did not respond to questions about whether it had assessed the legal risks associated with its letter to LVMH.
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- The French version of this article can be found here.
English version by Michael Streeter