Jeweller Harry Winston is selling its high-end watches-to-necklaces division to Swatch, in a $750 million cash deal that expands the Swiss watchmaker's luxury offering and lets the Canadian group concentrate on its diamond mines.
Monday's deal reverses a 2004 acquisition which turned the mining group that discovered Canada's Diavik deposit - now controlled by Rio Tinto - into a miner and jeweller.
The original mining arm is renamed Dominion Diamond Corporation after the sale of Harry Winston, which started as a small jeweller in New York in 1924 and rapidly became a favourite with movie stars.
For Swatch, the deal is evidence of the benefits of strong Asian demand for watches, handbags and other high-end items that has given companies the firepower to expand their portfolio.
Harry Winston - which Marilyn Monroe mentioned in her song “Diamonds are a girl's best friend” - has the potential to generate more than 1 billion Swiss francs ($1.10 billion) in sales and 250 million net profit in about 4-5 years, Swatch's chief executive Nick Hayek said.
A 20-25 percent net profit margin was in line with group profitability, Hayek told Reuters in an interview. “If watches continue to grow as dynamically as in 2012, 9 billion franc sales are within reach in 2013. Now in view of this acquisition, it can of course be even more,” he said.
Swatch Group is already the world's biggest watchmaker by sales, with 8.1 billion francs sales in 2012 thanks to brands such as Omega. Buying Harry Winston allows it to enter high-end jewellery, a market dominated by Richemont with its flagship brand Cartier.
The mining arm and the jeweller will continue to work together through a diamond sourcing deal under Monday's purchase, which includes Swatch taking on $250 million of debt. The two companies will also consider opportunities for a joint diamond polishing venture.
“From a strategic perspective it is positive - Swatch Group has long said it wanted to expand in jewellery,” Kepler Capital Markets analyst Jon Cox said. “At first glance it does not look cheap, but that is probably more a reflection of the profitability of Harry Winston at this stage, which is in ramp-up stage in terms of expansion.”
Reuters reported in October last year that Harry Winston was considering splitting off and selling its watch and jewellery business. At the time, analysts put the value at around $770 million, but said they expected a premium, comparing the deal with the acquisition of jeweller Bulgari by the world's biggest luxury goods group LVMH for $5.2 billion in 2011.
“We estimate an enterprise value to EBITDA (earnings before interest, tax, depreciation and amortisation) of 23x, which looks expensive but already LVMH paid 21x for Bulgari,” Vontobel analyst Rene Weber said.
“For Swatch Group we consider this as a positive move as it fills the gap in the high-end jewellery watch brand after the disaster with Tiffany. And it is also a positive move as Swatch Group can use its cash of 2 billion francs,” he said.
Swatch Group ended a partnership with jeweller Tiffany in 2011.
Shares in Swatch Group were up 4 percent at 11:57 SA time, outperforming a 1.5 percent rise in the sector index.
RED CARPET EVENTS
“The Harry Winston brand now has a new home that can provide the skills and support that it deserves to realize its true potential,” said Robert A. Gannicott, chairman of the board and chief executive of Harry Winston Diamond Corp.
For the mining arm, this will focusing on becoming one of a handful of pure-play diamond companies at a time when the gems are increasingly scarce and prices are expected to rise.
Harry Winston bought BHP Billiton's EKATI diamond mine in November for $500 million, betting on rising prices. Its partner in Diavik, mining giant Rio, is also reviewing its involvement in diamonds and could sell operations which include Diavik and the Argyle mine in Australia, famous for its pink diamonds.
Harry Winston was made famous by Marilyn Monroe's reference in the film “Gentlemen Prefer Blondes”. Every year the firm lends out hundreds of millions of dollars' worth of jewels to be worn by movie stars at events like the Oscars.
Mergers and acquisitions in the watchmaking industry have also been boosted by Swatch Group's decision to cut back on watch component and movement deliveries, forcing peers to improve their access to watchmaking know-how.
Swatch Group itself has bought more than a dozen component makers over the last 10 years, its most recent buys being watch case maker Simon & Membrez and a 60 percent stake in case polisher Termiboites last year.
The last watchmakers it took over were high-end brands Glashuette Original and Jaquet Droz in 2000. - Reuters