In November, the iconic American jeweler Tiffany (NYSE:TIF) agreed to sell itself to the French luxury powerhouse LVMH (OTC:LVMHF) (OTC:LVMUY) for a whopping $16.2 billion. The deal came after months of speculation and an earlier rejected offer at $120 per share. In the end, LVMH was able to clinch the deal after raising its offer price to $135 per share -- a nice premium over Tiffany's $90 share price in October.

After inking such a large deal at a premium price, an acquirer often sees its stock price decline. But in this case, LVMH's stock actually moved higher immediately after the deal was announced -- signifying the market's approval. What is it about this deal that has shareholders bullish?

A prized strategic asset

At its core, LVMH is a portfolio of global luxury brands including Louis Vuitton handbags, Dom Perignon champagne, Hublot watches, and Bulgari jewelry. These luxury assets have been carefully selected and acquired over the years.

Tiffany fits into this portfolio well. Founded in 1837, the Tiffany brand is synonymous with high-end jewelry including diamond rings, bracelets, and necklaces. Shoppers at Tiffany are willing to pay a premium for the company's signature jewelry designs and noticeable blue boxes.

In addition to meeting the high bar for its strong brand power, Tiffany is a global franchise, with 321 stores all around the world in high-end shopping districts. This includes 145 stores in the strategically important Asian continent, where significant growth has been driven by newly rich and brand-hungry Chinese buyers.

LVMH rightfully sees a great deal of value in Tiffany's brand. Based on the company's initial commentary, it doesn't intend to change Tiffany much, but it wants to fuel the company's growth in Europe, where Tiffany has fewer stores, and bolster growth in China. This should be a straightforward playbook for LVMH to execute and create value from.

Woman showing her diamond ring.

Image Source: Getty Images.

Financed cheaply

As part of the deal, LVMH is paying Tiffany shareholders in cash and will not be issuing any shares. In other words, LVMH will be issuing debt and using the cash proceeds from the debt to consummate the acquisition.

An all-cash deal is beneficial for LVMH for two key reasons.

First, the interest rate on the debt issued will likely be really low. How low? Well, LVMH's bonds issued in February 2019 featured an interest rate below 1%. Interest rates for European companies are extremely low due to zero/negative interest rate policies on the continent.

Second, because no equity will be issued, existing LVMH shareholders won't experience share dilution. This translates to the per-share value of LVMH growing faster because the number of shares won't increase despite meaningful underlying growth in earnings from the addition of Tiffany.

Financing a sensible acquisition with cheap debt is a good way to spark earnings growth. LVMH projects that the deal will increase EPS growth in 2020 by 5%.

Extending LVMH's strength in jewelry

In addition to the highlights listed above, it is worth mentioning that LVMH already has a world-class jewelry franchise that includes brands such as Bulgari, Hublot, Chaumet, and Tag Heuer. Adding Tiffany to this list should only strengthen LVMH's overall capabilities in the category.

Generally speaking, LVMH's existing jewelry brands skew to an even higher-end customer than Tiffany, which suggests that the Tiffany acquisition could be a way for LVMH to attract customers across a wider spectrum of the luxury jewelry market. Also, adding another major jewelry brand could give LVMH more purchasing power in the market for gemstones and precious metals, which could help reduce procurement costs and improve margins across the board.

One thing is for sure: LVMH knows how to operate luxury brands in general and jewelry brands in particular. Investors place a very high degree of confidence in LVMH's ability to continue a strong tradition of fine merchandising and branding at Tiffany. Given the company's track record, it is probably a safe bet that LVMH will be able to create a lot of value from the acquisition.