The “diamond king” now wears a Swiss crown

The response was quick in coming. The minute Swatch announced it had acquired Harry Winston’s watch and jewellery arm for US$1 billion, the group’s shares leapt more than 3% on the Swiss stock exchange, reaching a new all-time record with high trading volume. The financial community welcomed this strategic operation which takes The Swatch Group well and truly into the highly coveted diamond and jewellery market. In October last year, when Harry Winston had announced indications of interest from potential buyers, the world’s biggest watchmaker by sales wasn’t even among the frontrunners, precisely because of its strong associations with time measurement and major investment in its industrial base. Analysts were putting their money on LVMH or PPR to win the deal. Swatch took everyone by surprise.

The group had been looking to gain a more comfortable foothold in jewellery for some time. Its cooperation with Tiffany ended acrimoniously and the two parties are now communicating through their lawyers, with Swatch seeking CHF 3.8 billion in damages and Tiffany filing a counter-claim for CHF 542 million. The Biel/Bienne group has everything to gain from the acquisition of Harry Winston, whose 2012 revenues totalled US$ 412 million. The brand, whose founder would quickly be dubbed “the diamond king”, is one of the biggest global names in luxury for its jewellery as well as for its high-profile incursions into fine watchmaking, principally through its Opus watches, Histoire de Tourbillon, and Project Z in zalium, its very own alloy.

Jeweller to the stars

Harry Winston (1896-1978) set up The Premiere Diamond Company in 1920 on Fifth Avenue in Manhattan. Twelve years later he opened his first store, in New York’s Rockefeller Center. The brand would expand worldwide with, at its head, a man who has had some of the world’s most fabulous diamonds pass through his hands, including the legendary Hope and the Taylor-Burton. Harry Winston jewels have adorned both blue-blooded royalty, from the Duchess of Windsor to the Maharani of Jaipur, and Hollywood royalty. Stars such as Gwyneth Paltrow, Halle Berry, Glenn Close, Juliette Binoche and Sharon Stone have all worn Harry Winston jewels on the red carpet. In 2004, Canada’s Aber Diamond Corporation acquired a stake in Harry Winston, enabling the firm to verticalise production from mining to retailing. Two years later, Aber Diamond finalised the transaction and acquired 100% of ownership. The company changed its name to Harry Winston Diamond Corporation and was listed on the New York Stock Exchange in 2007.

Under this latest deal, Swatch Group acquires 100% of HW Holdings, owner of the Harry Winston brand, and all its watch and jewellery activities, including 535 employees and the production centre in Geneva. Swatch is to pay US$ 750 million for the shares and assume US$ 250 million in net debt. The transaction does not include the Canadian group’s mining activities, which will continue under the name Dominion Diamond Corporation, listed in New York and Toronto. According to Barclays, Swatch and Dominion will begin a long-term partnership. The bank considers the deal to be an excellent strategic operation as it secures diamond supplies for the Swiss group. The possibility of a joint diamond polishing venture has also been raised.

Excellent potential for increased profitability

Which leaves the question of price. Analysts, including Patrick Schwendimann at Banque Cantonale de Zurich (BCZ), say the cost of the acquisition (CHF 920 million) shouldn’t make much of a dent in the CHF 2 billion which The Swatch Group has in cash reserves. The transaction represents 2.4 times Harry Winston’s sales and 31.5 times earnings before interest, tax, depreciation and amortization (EBITDA), which Barclays calculates at US$ 31.8 million for the last financial year. By way of comparison, the last major takeover in the sector – that of Bulgari by LVMH – cost 22 times earnings but 3.7 times sales.

Another reason why the cost of the acquisition isn’t particularly excessive, and even a good deal on the basis of BCZ figures for sales, is Harry Winston’s potential to become more profitable. The Swatch Group’s EBITDA for 2012 has been estimated at 27.5% whereas that of the jeweller comes in at well under 10%, after recently declaring to investors a target of 15% by 2016. Swatch has bought a prestigious name that clearly dominates the US market, but not only, and has the means to make it prosper in an expanding sector. The stock exchange’s positive response to the news should come as no surprise. Swatch bearer shares have surged 41.7% in six months, even if the group’s management has long been sceptical of the stock exchange. A feeling that clearly isn’t mutual!