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Luxury group LVMH is in discussions with Tiffany & Co. about a potential takeover.

Arnd Wiegmann/Reuters

LVMH has offered to buy Tiffany & Co., known for its engagement rings and ties to Hollywood glamour, as the owner of Louis Vuitton and Bulgari seeks to expand in jewellery, one of the fastest-growing parts of the luxury-goods market.

In a deal that would beef up its smallest business and give it a slice of the lucrative U.S. market, LVMH on Monday said it had approached Tiffany about an unsolicited non-binding offer, but gave no details.

Confirming the move, Tiffany said the offer was worth US$120 a share, which would value Tiffany at nearly US$14.5-billion and represents a 22 per cent premium over the stock’s closing price on Friday.

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Tiffany’s shares surged as much as 31 per cent to one-year highs at around US$130 in New York, and are on track for their best daily performance since the 182-year-old company’s market listing in 1987.

Several analysts said Tiffany might reject the offer to seek a higher price, potentially kicking off a battle for control of the company known for its signature robin’s egg blue packaging.

Tiffany has only said for now that it was reviewing the proposal.

LVMH said there was no guarantee that preliminary discussions would result in an agreement. Its shares ended the day down 0.48 per cent after gaining around 1 per cent earlier.

Analysts at Credit Suisse and Cowen said Tiffany could be worth as much as US$140 to US$160 a share, based on the level of premium elicited by the likes of Bulgari, although that would be a leap from a price that LVMH already deems generous, a source familiar with the group’s approach said.

Tiffany stock is valued at a big discount to the U.S and European sector as it grapples with falling demand from Chinese tourists and competition from lower-priced rivals such as Denmark’s Pandora A/S and Signet Jewelers.

After a recent lacklustre performance - Tiffany’s shares have lost almost a third of their value since hitting all-time highs in July last year - shareholders would be likely to welcome a takeover, William Blair analyst Dylan Carden said.

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“Three years into its turnaround strategy, Tiffany is an arguably more attractive asset than it has been historically,” he said.

Tiffany’s shares had gained 22.4 per cent so far this year to Friday’s close, compared to a nearly 50 per cent increase in LVMH’s.

GLOBAL BRAND

Tiffany, founded in New York in 1837 and made famous by the 1961 movie Breakfast at Tiffany’s starring Audrey Hepburn, had struggled with falling annual sales and profit since 2015, before a revenue turnaround in 2017.

Under chief executive officer Alessandro Bogliolo, former head of fashion firm Diesel and a Bulgari alumni, the brand has been building up its e-commerce business, and trying to court younger shoppers with more affordable pendants and earrings and new designs.

These include Paper Flowers, a floral jewelry collection made of platinum and diamonds priced between US$2,500 and US$75,000. Tiffany has also used celebrities such as pop star Lady Gaga to front its campaigns.

If a deal emerges, it would be the biggest acquisition to date by LVMH, owned by France’s richest man, Bernard Arnault.

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LVMH’s 2011 purchase of Bulgari transformed its smallest and newest business division, jewelry and watches, which also includes Hublot and Tag Heuer watches.

The luxury goods group, along with rival Kering, is one of the few with the financial firepower for such a deal. UBS analysts estimate cash-rich LVMH has an M&A treasure chest of some 40 billion euros (US$44.4 billion).

LVMH has long had Tiffany in its sights as a potentially desirable target, a source at the company had previously said.

Adding the brand would bolster LVMH’s exposure to the bridal and diamond category, as well as to U.S. luxury shoppers and Tiffany’s overseas network.

“Tiffany is potentially the biggest prey and the only U.S. global luxury brand,” analysts at Jefferies said.

Jewelry was one of the strongest-performing areas of the luxury industry in 2018, according to consultancy Bain & Co, which forecast that comparable sales in the 18 billion euro (US$20 billion) global market were set to grow 7 per cent this year.

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RIVALS BULK UP

Jewelry and watches accounted for 9 per cent of revenue and 7 per cent of LVMH earnings in 2018, about only a fifth the size of its core fashion and handbag business, home to brands like Christian Dior, Givenchy and Louis Vuitton.

LVMH’s move on Tiffany stirred speculation about more luxury sector deals, boosting shares in European watch and jewelry companies, including Salvatore Ferragamo, Pandora , Swatch and Richemont.

The potential deal also comes as some of LVMH’s watch brands such as Tag Heuer have struggled, in part as they try to adapt to the rise of smartwatches. The sector has been hit hard by turmoil in Hong Kong, a major market for high-end timepieces.

LVMH’s rivals, Gucci-owner Kering and Switzerland’s Richemont, which owns Cartier, are also bulking up in high-end jewelry.

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