French luxury goods company LVMH is terminating its merger agreement with U.S. jeweler Tiffany & Co., citing trade tensions between the two countries.

LVMH finance chief Jean Jacques Guiony said the company received a letter from the French foreign ministry asking it to delay closing of the deal until after January 6, 2021 due to the threat of U.S. tariffs.

Guiony said the letter from the foreign ministry was unsolicited and came as a surprise.

“The deal cannot happen. We are prohibited from closing the deal,” he said. He also called Tiffany’s performance in recent months, “lackluster.”

LVMH signed a $16 billion merger agreement with Tiffany last year that called for a closing deadline of November 20. Tiffany later requested that date be extended to December 31.

Tiffany, in a lawsuit filed in Delaware to keep the deal on track, said LVMH’s real goal was, “to attempt to renegotiate the merger price to which the parties agreed last November and, barring renegotiation, run out the clock.”

In July, the U.S. announced a 25% tariff on French goods, citing France’s Digital Services Tax, which the U.S. Trade Representative said was primarily directed toward U.S. companies. Those tariffs are scheduled to take effect on January 6, 2021.

“It’s a great way out for LVMH,” said Keith Temperton, a trader at Forte Securities. “They had paid a top-of-the-market price ahead of the pandemic for Tiffany. It’s not surprising, their efforts to wriggle out of it.”

Tiffany reported global sales of $747.1 million for the three months ended July, a drop of 29% year over year. Global net sales had seen a 45% year-over-year drop the previous quarter.

Revenues in the luxury industry are expected to fall by as much as 35% this year and may not recover to last year’s levels until 2022-2023, according to Bain.

Budrul Chukrut/SOPA Images/LightRocket via Getty Images

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