QUESTION 5. This question contains 7 subparts, please complete all. (Total 45 marks) Mot Hennessy Louis Vuitton SE (LVMH) is a French luxury conglomerate formed in 1987 following the merger of the French fashion and leather goods company Louis Vuitton and the French wines and spirits producer Mot Hennessy. LVMH stocks are listed on the Euronext Paris (Ticker: MC.PA). U.S. investors could purchase the stocks via unsponsored, Level I ADRs (Ticker: LVMUY), where five ADRs represent one underlying share. LVMH has grown to be the world's largest luxury group with a strategy of acquiring established luxury brands, enabling it to operate in all six segments in the luxury market: wines and spirits (e.g., Belvedere, a Polish vodka brand fully acquired in 2005), fashion and leather goods (e.g., Loewe, a Spanish luxury fashion house fully acquired in 1996), perfumes and cosmetics (e.g., Fresh, an American cosmetics company acquired in 1999), watches and jewelry (e.g., Bulgari, an Italian jeweller and watchmaker acquired in 2011), selective retailing (e.g., DFS, the airport duty-free retailer founded in Hong Kong acquired in 1997), and other activities (e.g., Belmond, a luxury travel and hotel chain based in Bermuda acquired in 2019). Tiffany & Co. (Tiffany"), an American luxury jewellery and specialty retailer, was founded in 1837. It is known for its innovative designs and expert craftsmanship. In January 2021, it became LVMH's most recent acquisition through a deal of US$15.8 billion. The Tiffany acquisition will roughly double the size of LVMH's jewellery and watch business, and the number of LVMH-owned brands grows to 75. The deal is expected to allow LVMH expand deeper into jewellery and strengthen its presence in the U.S. For Tiffany, the deal is expected to strengthen Tiffany's presence in Europe and China (Investopedia, 2021). To finance the Tiffany purchase, in February 2020, LVMH sold 7.5 billion euro-denominated bonds and 1.55 billion pound-denominated bonds of varying maturities from 2 to 11 years that carried very low yields. Two of the euro tranches were placed at negative yields, meaning investors are paying LVMH to borrow money; and the longest 11-year euro tranche has a coupon of just 0.45% p.a. LVMH's access to "dirt cheap funding in its home currency to buy an American company" was thanks to ECB's To finance the Tiffany purchase, in February 2020, LVMH sold 7.5 billion euro-denominated bonds and 1.55 billion pound-denominated bonds of varying maturities from 2 to 11 years that carried very low yields. Two of the euro tranches were placed at negative yields, meaning investors are paying LVMH to borrow money; and the longest 11-year euro tranche has a coupon of just 0.45% p.a. LVMH's access to "dirt cheap funding in its home currency to buy an American company" was thanks to ECB's unprecedented stimulus policies, which was intended to lower European companies' funding costs to invest at home (Bloomberg, 2020). LVMH released its semi-annual earnings report on July 26, 2021. Asia, especially China, continued to drive LVMH's revenue growth, accounting for nearly 40% of the group's revenue; the U.S. market ranked second and also saw sustained growth, while sales in Europe slowly recovered from COVID disruptions. LVMH stocks reached historic high in early August. On August 17, 2021, the Chinese President Xi Jinping gave remarks at the 10th Meeting of the Central Committee for Financial and Economic Affairs that emphasised on China's commitment on promotion of common prosperity" and to narrow China's growing wealth gap. A selloff of stocks in the luxury industry followed, wiping out 60 billion euros from the value of Europe's top luxury stocks, including LVMH (WSJ, 2021). However, in an October earnings call following the release of Q3 results, LVMH's CFO has stated that the company is not worried because the bulk of its customer base in China is the upper-middle class. Asia (excl. Japan) again contributed the most to LVMH's business for Q3 (Bloomberg, 2021). MC.PA is currently at 683.40 and LVMUY is trading at $159.10. The spot rate is $1.16/. The Bermuda dollar is pegged to the USD. Based SOLELY on the case information above and what we have learnt in this course, answer the following questions. a. LVMH started out as a successful French enterprise. Name all the locations it now operates in. What factors do you think have been driving its global expansion history and choices? Discuss and clearly relate each factors to LVMH's core business. (6 marks) pegged to the USD. Based SOLELY on the case information above and what we have learnt in this course, answer the following questions. a. LVMH started out as a successful French enterprise. Name all the locations it now operates in. What factors do you think have been driving its global expansion history and choices? Discuss and clearly relate each factors to LVMH's core business. (6 marks) b. Much of LVMH's global expansions involved cross-border acquisitions of foreign businesses and established brands. Compare this strategy against each of the different international entry strategies we have discussed in class; make sure to identify and explain why you think LVMH focused on acquisition rather than other entry strategies or models. (8 marks) c. Explain all relevant types of risks that LVMH may be facing in its international operations. Ensure to name the currencies that it is exposed to. Also, suggest TWO reasonable management strategies for EACH risk type that you have identified. (8 marks) d. LVMH attempted to acquire Herms, a 184-year-old iconic French luxury brand and LVMH's long-time competitor. However, Herms fought off the acquisition attempt. In addition to the explicit reason already provided in the case, suggest and discuss TWO other plausible reasons you have learned in the course to explain why Tiffany, itself with 184 years' history, would be willing to be acquired by LVMH.(3 marks) courses / FINM8007_Sem2_2021 / Assessments - All reference to time is in Canberra time! 1 Exam QUESTION 5 (Cont'd) (Total 45 marks) e. LVMH financed the Tiffany acquisition with new bond issuance. Discuss all potential financing choices that are available to LVMH, and why it did not choose other alternative financing methods. (7 marks) f. After reading through this case, you and your friend, Zac, are impressed by LVMH's growth strategy and optimistic about the company and the luxury industry's growth in the future. (i) Zac, who lives in the U.S., would like to invest in LVMH's shares. You have learned 8007 and you know exactly what to do. Describe the entire process to Zac, be sure to identify all the market participants involved in the process and what takes place at each step. (7 marks) (ii) If you want to invest in LVMH's shares from your home market, and your home market is not in France nor the U.S.. What option is available to you? (1 mark) g. Comment on the prices of MC.PA and LVMUY in the context of the Law of One Price. Be sure to specify how you expect the two prices to behave, provide calculations. (5 marks) QUESTION 5. This question contains 7 subparts, please complete all. (Total 45 marks) Mot Hennessy Louis Vuitton SE (LVMH) is a French luxury conglomerate formed in 1987 following the merger of the French fashion and leather goods company Louis Vuitton and the French wines and spirits producer Mot Hennessy. LVMH stocks are listed on the Euronext Paris (Ticker: MC.PA). U.S. investors could purchase the stocks via unsponsored, Level I ADRs (Ticker: LVMUY), where five ADRs represent one underlying share. LVMH has grown to be the world's largest luxury group with a strategy of acquiring established luxury brands, enabling it to operate in all six segments in the luxury market: wines and spirits (e.g., Belvedere, a Polish vodka brand fully acquired in 2005), fashion and leather goods (e.g., Loewe, a Spanish luxury fashion house fully acquired in 1996), perfumes and cosmetics (e.g., Fresh, an American cosmetics company acquired in 1999), watches and jewelry (e.g., Bulgari, an Italian jeweller and watchmaker acquired in 2011), selective retailing (e.g., DFS, the airport duty-free retailer founded in Hong Kong acquired in 1997), and other activities (e.g., Belmond, a luxury travel and hotel chain based in Bermuda acquired in 2019). Tiffany & Co. (Tiffany"), an American luxury jewellery and specialty retailer, was founded in 1837. It is known for its innovative designs and expert craftsmanship. In January 2021, it became LVMH's most recent acquisition through a deal of US$15.8 billion. The Tiffany acquisition will roughly double the size of LVMH's jewellery and watch business, and the number of LVMH-owned brands grows to 75. The deal is expected to allow LVMH expand deeper into jewellery and strengthen its presence in the U.S. For Tiffany, the deal is expected to strengthen Tiffany's presence in Europe and China (Investopedia, 2021). To finance the Tiffany purchase, in February 2020, LVMH sold 7.5 billion euro-denominated bonds and 1.55 billion pound-denominated bonds of varying maturities from 2 to 11 years that carried very low yields. Two of the euro tranches were placed at negative yields, meaning investors are paying LVMH to borrow money; and the longest 11-year euro tranche has a coupon of just 0.45% p.a. LVMH's access to "dirt cheap funding in its home currency to buy an American company" was thanks to ECB's To finance the Tiffany purchase, in February 2020, LVMH sold 7.5 billion euro-denominated bonds and 1.55 billion pound-denominated bonds of varying maturities from 2 to 11 years that carried very low yields. Two of the euro tranches were placed at negative yields, meaning investors are paying LVMH to borrow money; and the longest 11-year euro tranche has a coupon of just 0.45% p.a. LVMH's access to "dirt cheap funding in its home currency to buy an American company" was thanks to ECB's unprecedented stimulus policies, which was intended to lower European companies' funding costs to invest at home (Bloomberg, 2020). LVMH released its semi-annual earnings report on July 26, 2021. Asia, especially China, continued to drive LVMH's revenue growth, accounting for nearly 40% of the group's revenue; the U.S. market ranked second and also saw sustained growth, while sales in Europe slowly recovered from COVID disruptions. LVMH stocks reached historic high in early August. On August 17, 2021, the Chinese President Xi Jinping gave remarks at the 10th Meeting of the Central Committee for Financial and Economic Affairs that emphasised on China's commitment on promotion of common prosperity" and to narrow China's growing wealth gap. A selloff of stocks in the luxury industry followed, wiping out 60 billion euros from the value of Europe's top luxury stocks, including LVMH (WSJ, 2021). However, in an October earnings call following the release of Q3 results, LVMH's CFO has stated that the company is not worried because the bulk of its customer base in China is the upper-middle class. Asia (excl. Japan) again contributed the most to LVMH's business for Q3 (Bloomberg, 2021). MC.PA is currently at 683.40 and LVMUY is trading at $159.10. The spot rate is $1.16/. The Bermuda dollar is pegged to the USD. Based SOLELY on the case information above and what we have learnt in this course, answer the following questions. a. LVMH started out as a successful French enterprise. Name all the locations it now operates in. What factors do you think have been driving its global expansion history and choices? Discuss and clearly relate each factors to LVMH's core business. (6 marks) pegged to the USD. Based SOLELY on the case information above and what we have learnt in this course, answer the following questions. a. LVMH started out as a successful French enterprise. Name all the locations it now operates in. What factors do you think have been driving its global expansion history and choices? Discuss and clearly relate each factors to LVMH's core business. (6 marks) b. Much of LVMH's global expansions involved cross-border acquisitions of foreign businesses and established brands. Compare this strategy against each of the different international entry strategies we have discussed in class; make sure to identify and explain why you think LVMH focused on acquisition rather than other entry strategies or models. (8 marks) c. Explain all relevant types of risks that LVMH may be facing in its international operations. Ensure to name the currencies that it is exposed to. Also, suggest TWO reasonable management strategies for EACH risk type that you have identified. (8 marks) d. LVMH attempted to acquire Herms, a 184-year-old iconic French luxury brand and LVMH's long-time competitor. However, Herms fought off the acquisition attempt. In addition to the explicit reason already provided in the case, suggest and discuss TWO other plausible reasons you have learned in the course to explain why Tiffany, itself with 184 years' history, would be willing to be acquired by LVMH.(3 marks) courses / FINM8007_Sem2_2021 / Assessments - All reference to time is in Canberra time! 1 Exam QUESTION 5 (Cont'd) (Total 45 marks) e. LVMH financed the Tiffany acquisition with new bond issuance. Discuss all potential financing choices that are available to LVMH, and why it did not choose other alternative financing methods. (7 marks) f. After reading through this case, you and your friend, Zac, are impressed by LVMH's growth strategy and optimistic about the company and the luxury industry's growth in the future. (i) Zac, who lives in the U.S., would like to invest in LVMH's shares. You have learned 8007 and you know exactly what to do. Describe the entire process to Zac, be sure to identify all the market participants involved in the process and what takes place at each step. (7 marks) (ii) If you want to invest in LVMH's shares from your home market, and your home market is not in France nor the U.S.. What option is available to you? (1 mark) g. Comment on the prices of MC.PA and LVMUY in the context of the Law of One Price. Be sure to specify how you expect the two prices to behave, provide calculations