Trade fight dooms LVMH's $16 billion Tiffany deal

The French conglomerate announced Wednesday that as things stand, it would not "be able to complete" the $16.2 billion deal — which was announced last November — because of "a succession of events which undermine the acquisition."

Those events included a recent letter from the French government calling on the company to defer its takeover of Tiffany until January 2021 in response to the US threat of taxes on French products, LVMH said in a statement.

The United States announced in July that it would impose tariffs of 25% on French products including makeup and handbags as part of a dispute over taxing digital companies, but delayed collection of the tariffs until January 6, 2021. LVMH said Wednesday that the French government had "directed" it to delay the acquisition beyond that date.

Tiffany said that the request from the French government had no legal grounds. The US company said it had filed a lawsuit in Delaware that aims to force LVMH to complete the deal.

"We regret having to take this action but LVMH has left us no choice but to commence litigation to protect our company and our shareholders," Tiffany Chairman Roger Farah said in a statement.

Tiffany shares plunged more than 10% in premarket trading in New York, while LVMH shares dropped about 1% in Paris.

The breakdown comes after months of speculation that LVMH had been looking to renegotiate the deal — or for a way out — because of the crash in luxury sales due to the coronavirus. In June, the company disclosed that its board had met to review the agreement, as well as "the development of the pandemic."

'Convenient for LVMH'

That showed that the coronavirus crisis had forced businesses to reevaluate their expenditures, according to Luca Solca, a luxury goods research analyst at Bernstein.

"I think the most important intervening factor between the time when the deal was agreed and now, is the Covid-19 pandemic," he told CNN Business.

Solca said that the tariff threat LVMH cited on Wednesday was also significant. "Clearly, this demand by the French government happens to be convenient for LVMH," he added.

It could open up "the possibility sometime down the road, to possibly go back to renegotiate the deal, which we all had the impression could potentially be one of the aims that LVMH was after," he added.