The Wall Street Journal - 26.11.2019

B12| Tuesday, November 26, 2019 ** THE WALL STREET JOURNAL.

Tiffany Accepts a Shinier Proposal

After raising its offer, the luxury giant behind Louis Vuitton will need time to polish the U.S. jeweler

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

China’s share of global exports peaked in 2015 at around 15%.

CAO YIMING/XINHUA/ZUMA PRESS

For online brokerage investors,

it is about the destination, not the

journey.

With the formal announcement

of its acquisition byCharles

Schwabat an implied valuation of

$26 billion via an all-share deal,

TD Ameritradeholders have

earned back the value lost when

Schwab announced a move to zero

trading commissions on Oct. 1.

That might seem frustrating at

first blush. Ameritrade was valued

at $30 billion as recently as April.

But given the price aggressiveness

of Schwab and Fidelity a fresh

start with a bigger, more diversi-

fied company is a good outcome.

Ameritrade’s share price fell 26%

on the day that the zero commis-

sion headlines hit.

It will take time for all the ben-

efits of getting together to flow

through. Schwab and Ameritrade

said they envisioned 10% to 15%

accretion, referring to a bump in

earnings per share. But this won’t

be fully realized until the third

year after the companies combine.

One reason is thatToronto-Do-

minion Bank, Ameritrade’s 43%

owner, will continue holding

Ameritrade customer cash for

some time. A potential boost to

the combined brokerage would

have been that cash moving into

Schwab’s bank, which earns a

higher net interest margin than

Ameritrade did in an arrangement

in which it sent cash over to TD

Bank. Ameritrade’s current ar-

rangement will remain in some

form until 2031. Schwab still needs

to pay Ameritrade’s fees for the

deposit arrangement, though TD

Bank will reduce the servicing fee.

Schwab will be able to start mov-

ing $10 billion of Ameritrade’s

roughly $110 billion in relevant cli-

ent money a year into its own

bank as soon as 2021.

Investors aren’t wrong to envi-

sion this deal, creating a brokerage

with $5.1 trillion in client assets

and 24.1 million accounts, generat-

ing even more value, but they need

to be patient.

—Telis Demos

Give This

Brokerage

Deal Time

To Work Out

Ameritrade-Schwab

pact has promise

ForeBay, selling StubHub may

prove to be the easy part.

The e-commerce company found

a buyer for the ticket reselling op-

eration it acquired back in 2007.

Viagogo Entertainment, a Swiss-

based ticket reseller, is paying

$4.05 billion for StubHub. That

marks a nice return for eBay con-

sidering the $310 million it spent

on the original purchase. It proba-

bly helped that the deal returns

StubHub to one of its original co-

founders who may have been in-

clined to overlook the flat growth

in third-quarter net transaction

revenue that eBay reported for

StubHub a month ago.

Those results helped trigger a

9% selloff from which eBay’s

shares have yet to fully recover.

But the stock is still up more than

26% for the year, largely on hope

sparked by Elliott Management

and Starboard Value. The Wall

Street Journal reported in January

that the activists separately took

positions in eBay and began agi-

tating for changes, including the

sale of the company’s StubHub and

classifieds businesses. The degree

of pressure became apparent two

months ago when eBay’s then-CEO

Devin Wenig stepped down, citing

conflicts with the company’s new

board that now includes represen-

tatives of both activists.

Scott Devitt of Stifel Nicolaus

noted Monday that the StubHub

price represents a 23% premium to

his estimated value of the busi-

ness. The real $4 billion question

is what eBay does from here. With

activists in place, a boost to buy-

backs seems inevitable. But eBay

already has been fairly generous in

this regard, as buybacks have ex-

ceeded free cash flow in four of

the last five years, according to

data from FactSet. Meanwhile, the

stock has only barely matched the

S&P 500’s gains over that time and

has languished compared with e-

commerce titanAmazon.com.

Selling StubHub will only make

the Amazon comparison tougher.

The ticket reseller accounted for

about 10% of eBay’s trailing 12-

month total revenue. The classi-

fieds business that is also on the

block makes up another 10%. What

remains is a marketplace business

generating a little under $9 billion

in annual revenue and barely

growing. Amazon’s online retail

business alone is on track to grow

15% this year to about $141 billion

in sales.

Selling off its other ventures

won’t be eBay’s ticket to a come-

back.

—Dan Gallagher

Share-price performance

Source: FactSet

500

–100

0

100

200

300

400

%

2015 ’16 ’17 ’18 ’19

eBay

Amazon

S&P500

The real potential may be in the jeweler’s profit margins, but improving them will take years of work.

JASON ALDEN/BLOOMBERG NEWS

If an engagement ring should

cost three months of a suitor’s sal-

ary,LVMH Moët Hennessy Louis

Vuittonis paying slightly over the

odds forTiffany& Co. But inves-

tors are feeling indulgent toward a

stock that has risen 66% this year.

On Monday, the world’s largest

luxury company agreed to buy the

U.S. jeweler for $16.2 billion in

cash—a 12% increase on its offer

four weeks ago. Including Tiffany’s

net debt of $350 million and the

value of stock options, the all-in

price of $16.9 billion represents

16.3 times the target’s projected

earnings before interest, taxes, de-

preciation and amortization. On a

less conventional metric, LVMH is

paying 3½ months’ its own reve-

nue for the new bauble.

The profit multiple paid for Tif-

fany is roughly in line with what

LVMH handed over for Christian

Dior and luxury cashmere brand

Loro Piana in 2017 and 2013, re-

spectively. However, Tiffany is al-

ready a big brand, which will limit

opportunities to expand it further.

The real potential may be in the

jeweler’s profit margins, which are

low by LVMH’s standards, but

improving them will take years

of work.

The early focus will be on the

store network and pricing. Unusual

for a luxury brand, Tiffany makes

the majority of its sales to Chinese

consumers within mainland China

itself. It has less presence in Eu-

rope, a popular destination for

wealthy Chinese tourists, and may

be missing out on spending there.

Opening more stores in the region,

as well as lowering prices relative

to the U.S., should offset slowing

demand in Tiffany’s domestic mar-

ket, where the strong dollar has

hurt the spending power of over-

seas visitors. The brand will also

need to increase its marketing

budget, valued at 9% of revenue in

2018, if it is to compete with rivals

such as Cartier, which is owned by

LVMH’s Swiss rival Cie.Financière

Richemont.

On a positive note, Tiffany al-

ready makes most of its sales in its

own stores. That means there will

be no need to close wholesale ac-

counts, a costly process many lux-

ury brands have had to go through.

LVMH also is happy with the

spread of Tiffany’s prices, which

range from a few hundred dollars

for its silver products up to mil-

lions in the fine-jewelry category.

The deal gives LVMH a bigger

presence in the luxury-jewelry

market, where sales are currently

growing by 7% a year, according to

Bain estimates. As jewelry manu-

facturing requires lots of capital,

barriers to entry should remain

high, protecting Tiffany from

smaller challengers.

But investors will have to wait

while the brand is turned around.

Even if Tiffany improves its growth

rate to the jewelry-market average

and expands its operating margins

to 23% from their current level of

18%, LVMH may only make a re-

turn on its investment above its

weighted average cost of capital by

2025, according to RBC analysts.

As with previous deals, LVMH will

run Tiffany independently rather

than looking for the kind of cost

synergies that justify acquisition

premiums in other industries.

Still, investors don’t seem wor-

ried about the high price: LVMH

stock rose Monday. The two make

an attractive pair, even if they will

take time to really sparkle.

—Carol Ryan

Share-price performance since

Schwab commissions cut to zero

Source: FactSet

20

–30

–20

–10

0

10

%

Oct. Nov.

CharlesSchwab

TDAmeritrade

U.S. Won’t Win or Lose Trade War

China-U.S. tensions may not

matter for global trade as much as

investors seem to think.

Talk of a Sino-American trade

war has dominated newspaper

headlines, market reports and cor-

porate boardroom discussions for

the past 18 months. But, in some

ways, what the escalating tariffs

have shown most clearly is how

difficult it is for one country—

even one as central to the global

economy as the U.S.—to reorder

global trade on its own.

China was losing global export

market share before the trade war,

and it still is, at about the same

pace. U.S. global export market

share, after a long decline in the

early 2000s, stabilized at about 9%

in the early postcrisis years. When

President Trump began his tariff

scrap with China in early 2018, it

stood at 8.7% according to Interna-

tional Monetary Fund data. In the

second quarter of 2019, it was still

8.7%.

This apparent stability masks

big changes in individual bilateral

trade flows. In early 2018, for ex-

ample, the U.S. imported a lot

more from China than it does to-

day—but significantly less from

Mexico and Southeast Asia. China,

meanwhile, has taken a significant

hit from U.S. tariffs, but much of

this has been offset by rapidly ris-

ing exports to Southeast Asia and

Taiwan. China exported $19 billion

less to the U.S. in the third quarter

of 2019 than a year earlier, but

nearly $17 billion more to Europe

and East Asia. The overall knock to

Chinese exports was a tough but

not catastrophic $2 billion, accord-

ing to revised Chinese figures.

One thing this picture shows is

how difficult it is to hold China’s

feet to the fire on trade without

buy-in from allies. More funda-

mentally, it shows how dependent

trade flows are on things besides

tariffs, particularly exchange rates

and long-term factors such as de-

mographics and innovative capac-

ity. China’s share of global exports

peaked in 2015 at around 15% and

has fallen, in more or less a

straight line downward, since

then. It currently clocks in around

13%. The rest of the world exclud-

ing the U.S. has, over the same pe-

riod, gained about 3 percentage

points of the export pie.

It isn’t entirely clear what is

driving these trends, but part of it

is probably China losing competi-

tiveness at the low end of the

manufacturing value chain. The

nation’s working-age population

peaked in 2013, and a deteriorat-

ing environment for private capital

in recent years—due to a more

statist tilt under the current lead-

ership—has weighed on manufac-

turing investment.

At the same time, China’s weak

rule of law and inefficient financial

system still pose challenges to the

nation’s ambitions to move further

toward the technological frontier

in high-tech manufacturing.

Japan’s big currency depreciation

beginning in late 2012 may also

have played a role. That country’s

share of global exports, after de-

clining through the early 2000s,

has since stabilized.

It seems likely Sino-U.S. trade

tensions will persist. What deter-

mines the fate of China’s trading

empire may ultimately depend less

on that, though, than on the policy

choices it makes to deal with its

own structural economic problems.

The same, most likely, applies to

America as well.

—Nathaniel Taplin

Why eBay Is Stuck in the Cheap Seats

OVERHEARD

Thanksgiving just isn’t as good

as it used to be.

That statement doesn’t have to

do with the tone of political dis-

course around the table, the qual-

ity of the side dishes or even the

excitement-level of afternoon

football games. While it wasn’t

widely known when it was hap-

pening, the U.S. stock market

used to be very kind to in-

vestors during the one-and-

a-half trading days around

the holiday. (U.S. ex-

changes are closed

on Thursday and on

Friday afternoon.)

Then, back in

1987, the Stock

Trader’s Alma-

nac pointed

out that

owning the

S&P 500 in-

dex during the

Wednesday and

Friday surrounding

Thanksgiving was as

close to a surefire bet as one

could get, with 34 of 35 preceding

years producing a positive return.

As luck would have it, the

trend turned into a turkey the

very year that it was pointed out.

A nasty 2.5% cumulative decline

knocked the stuffing out of inves-

tors who felt history would re-

peat that year. Since then, the re-

turns from owning stocks

around Thanksgiving have

been positive on aver-

age, but less so—

and less consis-

tently.

As a conso-

lation, though,

the “Santa

Claus Rally”

into the end

of the year

has grown

stronger. At

least some

holiday tradi-

tions can be

counted on.

WIN MCNAMEE/GETTY IMAGES