Tiffany & Co. will have to pay an arbitration award of about 402 million Swiss francs ($449 million) to Swatch Group AG after the timepiece maker claimed a breach of contract at their joint venture.
Swatch and Tiffany became embroiled in a legal battle in 2011 after the biggest maker of Swiss timepieces alleged the U.S. jeweler blocked development of their partnership. Tiffany said it honored obligations under the terms of the alliance the two companies had begun almost four years earlier, when they agreed to develop and sell watches under the Tiffany brand and share the profits.
Last month, Tiffany posted third-quarter profit that topped analysts’ estimates and boosted its annual earnings forecast, helped in part by higher prices and falling precious metal costs. The $449-million award doesn’t affect the company’s prospects, according to two analysts.
Tiffany “has the means to pay the total award with cash on hand, and the announcement eliminates a long-term overhang on the stock,” Ike Boruchow, an analyst with Sterne Agee & Leach Inc., wrote in a note to clients today. Citing a favorable outlook for Tiffany for next year, the New York-based analyst said “we would be buyers on any weakness in the shares.”
He reiterated his “buy” rating on the stock.
David Schick, an analyst with Stifel Financial Corp. in Baltimore, described the award as “the very definition of one-time.” Watches represent 1 percent of Tiffany’s sales and the jeweler was already preparing other options for the category, he said in a note to clients today. Schick recommends buying the shares.
Tiffany shares rose 0.5 percent to $91.06 at 10:09 a.m in New York while Swatch was little changed in Zurich.
Tiffany is reviewing options with its legal counsel, the U.S. company said in a statement yesterday. Beatrice Howald, a spokeswoman for Swatch, said she couldn’t comment on whether Tiffany can still appeal the decision. The payment is due immediately and interest dating back to June 2012 will be added to that, Howald said by phone today.
Tiffany will take a charge of $295 million to $305 million in the fourth quarter for the decision by an arbitration panel in the Netherlands. The charge may reduce earnings by as much as $2.35 a diluted share for the fiscal year ended Jan. 31, relative to the forecast of $3.65 to $3.75 a share given in November, Tiffany said in the statement.
“We were shocked and extremely disappointed by the decision of the arbitral panel,” said Michael Kowalski, Tiffany’s chief executive officer, adding that the company has sufficient financial resources to pay the damages and that it won’t affect the company’s ability to execute its business plans.
Tiffany earned $416 million in net income in its last fiscal year, according to data compiled by Bloomberg.
“This is great news for Swatch,” said Luca Solca, an analyst at Exane BNP Paribas. The amount to be paid is “not immaterial and it clears a question mark on the stock.” Before today’s trading, Tiffany stock had gained 58 percent in New York this year. Swatch has advanced about 27 percent, valuing the company at 30.4 billion francs.
Tiffany’s counterclaim was dismissed by the Netherlands Arbitration Institute, said Biel, Switzerland-based Swatch in a separate e-mailed statement.
The Swiss maker of Omega watches in January announced the $1 billion purchase of the Harry Winston watch and jewelry unit, adding a luxury label to its portfolio. That purchase filled the gap in its portfolio left by the dissolution of the Tiffany collaboration, analysts said at the time.