European Event-Driven Analyst

Jesus Rodriguez Aguilar

Jesús is an Insight Provider (Event-driven) on the Smartkarma network, where he looks across sectors at opportunities arising from securities mispricing (both credit and equity), share classes, bid announcements, prospective bids, and special situations. He has served as Economic and Business Advisor at the Spanish Congress in Madrid. Prior to that, he has worked in the City of London: as a Credit Analyst at Bloomberg; Event-driven associate at former boutique European Research; and doubled as Special Situations and Equity-linked VP (convertible bonds) at Merrill Lynch. Jesús has an MBA from the London Business School, a BA (Hons.) degree in Economics from the Complutense University in Madrid, and a BA (Hons.) in Law from U.N.E.D., also in Madrid.

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Event-Driven

On 22 April, after the market close, <a href="https://www.smartkarma.com/entities/tod-s-spa" target="_blank" data-smartkarma-citation="entities:21231:1" rel="noopener">Tod's SpA (TOD IM)</a> issued a press release which said that Delphine SAS, a subsidiary of <a href="https://www.smartkarma.com/entities/lvmh-moet-hennessy-louis-vui" target="_blank" data-smartkarma-citation="entities:21072:1" rel="noopener">Lvmh Moet Hennessy Louis Vuitton (MC FP)</a>, entered into an agreement to acquire an additional 6.8% stake in <a href="https://www.smartkarma.com/entities/tod-s-spa" target="_blank" data-smartkarma-citation="entities:21231:1" rel="noopener">Tod's SpA (TOD IM)</a> from Diego Della Valle &amp; C. S.A.P.A for a total consideration of €74.5 mn.
The 22 April agreement represented at the time 2.2x EV/Fwd Sales and 14.2x EV/Fwd EBITDA,an implied equity value of €1,095 mn and an implied EV of €1,625 mn, and a 11.2% premium to the 1-month WVAP.
On 19 May, Diego Della Valle said said that if he ever decided to sell his company it would be to LVMH's boss Bernard Arnault but he added that he had no current plans to do so. He added that LVMH's recent decision to raise its stake in Tod's was a message "that we like to stay together". He reiterated that if the right opportunity arose, the two groups might "do something together". The shares increased by 3.6% and closed at €48.56. I do not think the family will sell their company that easily when there is a recovery from the pandemic in sight and a new creative director.
Shares enjoyed good momentum after LVMH increased its shareholding in Tod's from 3.2% to 10%, on expectations of an offer by LVMH, but the market seems to have run ahead of itself and the trend may have reversed in the last trading sessions.
In the insight I present a bull (acquisition by LVMH) and a bear case (on valuation grounds, more realistic in my view) for Tod's.
As a standalone entity, Tod's lacks the economies of scale that LVMH enjoys. Without scale, there is a limit as to how much can Tod's shrink its cost structure (procurement of leather and other inputs, marketing and publicity budgets, training of artisans). A best-case scenario valuation would assume an offer from LVMH at an EV 2.0x pre-Covid sales, not expected until 2023e, at least, plus a 15% control premium and some synergies factored in, say 5%, and the valuation would be around €50/share.
At current market prices, Tod's market cap and revenue are respectively &lt;0.5% and 1.5% those of LVMH, hence I do not think that acquiring Tod's is a strategic priority for LVMH in the same way as Tiffany was, nor is it a game changer, no matter how much a successful turnaround of Tod's could achieve in the mid term.
On valuation grounds, Tod's shares do not seem such good value after the recent bull run. A blended average of DCF, WACC 7.8%, terminal growth 1.5%, and 6.8x terminal EBITDA multiple, FCF and EBITDA from capital IQ consensus) and 2.0x EV/22e Sales gives €35.26/share.
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Bernard Arnault, in contrast to the products offered at his stores, likes to buy cheap. His reputation is at stake and the renegotiation of the price tag for Tiffany is a case in point. Tod's does not seem a bargain right now.
Recommendation is short Tod'sTP 35.26/share, a 24% discount to the closing price on 20 May.
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Read across: <a href="https://www.smartkarma.com/entities/salvatore-ferragamo-spa" target="_blank" data-smartkarma-citation="entities:21220:1" rel="noopener">Salvatore Ferragamo (SFER IM)</a> is a similar situation to that of Tod's.

On 22 April, after the market close, Tod's SpA (TOD IM) issued a press release which said that Delphine SAS, a subsidiary of Lvmh Moet Hennessy Louis Vuitton (MC FP), entered into an agreement to acquire an additional 6.8% stake in Tod's SpA (TOD IM) from Diego Della Valle &amp; C. S.A.P.A for a total consideration of €74.5 mn.
The 22 April agreement represented at the time 2.2x EV/Fwd Sales and 14.2x EV/Fwd EBITDA,an implied equity value of €1,095 mn and an implied EV of €1,625 mn, and a 11.2% premium to the 1-month WVAP.
On 19 May, Diego Della Valle said said that if he ever decided to sell his company it would be to LVMH's boss Bernard Arnault but he added that he had no current plans to do so. He added that LVMH's recent decision to raise its stake in Tod's was a message "that we like to stay together". He reiterated that if the right opportunity arose, the two groups might "do something together". The shares increased by 3.6% and closed at €48.56. I do not think the family will sell their company that easily when there is a recovery from the pandemic in sight and a new creative director.
Shares enjoyed good momentum after LVMH increased its shareholding in Tod's from 3.2% to 10%, on expectations of an offer by LVMH, but the market seems to have run ahead of itself and the trend may have reversed in the last trading sessions.
In the insight I present a bull (acquisition by LVMH) and a bear case (on valuation grounds, more realistic in my view) for Tod's.
As a standalone entity, Tod's lacks the economies of scale that LVMH enjoys. Without scale, there is a limit as to how much can Tod's shrink its cost structure (procurement of leather and other inputs, marketing and publicity budgets, training of artisans). A best-case scenario valuation would assume an offer from LVMH at an EV 2.0x pre-Covid sales, not expected until 2023e, at least, plus a 15% control premium and some synergies factored in, say 5%, and the valuation would be around €50/share.
At current market prices, Tod's market cap and revenue are respectively &lt;0.5% and 1.5% those of LVMH, hence I do not think that acquiring Tod's is a strategic priority for LVMH in the same way as Tiffany was, nor is it a game changer, no matter how much a successful turnaround of Tod's could achieve in the mid term.
On valuation grounds, Tod's shares do not seem such good value after the recent bull run. A blended average of DCF, WACC 7.8%, terminal growth 1.5%, and 6.8x terminal EBITDA multiple, FCF and EBITDA from capital IQ consensus) and 2.0x EV/22e Sales gives €35.26/share.

Bernard Arnault, in contrast to the products offered at his stores, likes to buy cheap. His reputation is at stake and the renegotiation of the price tag for Tiffany is a case in point. Tod's does not seem a bargain right now.
Recommendation is short Tod'sTP 35.26/share, a 24% discount to the closing price on 20 May.

Read across: Salvatore Ferragamo (SFER IM) is a similar situation to that of Tod's.

Tod's SpA

LVMH/Tod's: Unlikely Deal for Now