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Swatch grows with Harry Winston buy

Silke Koltrowitz Zurich

Jeweller Harry Winston is selling its high-end watches-to-necklaces division to Swatch, in a $750 million (R6.5 billion) cash deal that expands the Swiss watch maker’s luxury offering and lets the Canadian group concentrate on its diamond mines.

A customer browses Swatch Group AG watches in the company's store on Oxford Street in London, U.K., on Monday, Feb. 6, 2012. Swatch Group AG, the largest maker of Swiss watches, fell the most in more than two months after reporting 2011 operating profit that missed analysts' expectations. Photographer: Jason Alden/Bloomberg. Credit: Bloomberg

Yesterday’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” – had the potential to generate more than Sf1bn (R9.5bn) in sales and Sf250m net profit in about four to five years, Swatch’s chief executive Nick Hayek said.

A 20 percent to 25 percent net profit margin was in line with group profitability, Hayek said. “If watches continue to grow… as in 2012, Sf9bn sales are within reach in 2013. Now in view of this acquisition, it can of course be even more.”

Swatch is the world’s biggest watch maker by sales, with Sf8.1bn 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 Cartier brand.

The mining arm and the jeweller will continue to work together through a diamond sourcing deal under yesterday’s purchase, which includes Swatch taking on $250m of debt. The companies will also consider opportunities for a joint diamond polishing venture.

“From a strategic perspective it is positive; Swatch 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 $770m, but said they expected a premium, comparing the deal with the acquisition of jeweller Bulgari by the biggest luxury goods group, LVMH Moët Hennessy Louis Vuitton, for $5.2bn in 2011.

“We estimate an enterprise value to Ebitda (earnings before interest, tax, depreciation and amortisation) of 23 times, which looks expensive but already LVMH paid 21 times for Bulgari,” Vontobel analyst Rene Weber said.

“For Swatch we consider this as a positive move as it fills the gap in the high-end jewellery watch brand.”

Rothschild advised Harry Winston on the transaction. – Reuters

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