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Tiffany & Co
Swatch Group AG (UHR), the biggest maker of Swiss timepieces, agreed to buy the Harry Winston (HW) watch and jewelry unit for about $1 billion, adding a luxury label in its biggest acquisition.
Swatch Group will pay Harry Winston Diamond Corp (HWD). $750 million and assume as much as $250 million in debt, the Biel- based company said in a statement today. Harry Winston Diamond, whose name was mentioned by Marilyn Monroe in “Diamonds are a Girl’s Best Friend,” said it will now be known as Dominion Diamond Corp. and focus on its diamond-mining operations.
The acquisition will help Swatch compete against Cie. Financiere Richemont SA’s Cartier brand in the market for high- end jewelry and watches decorated with precious stones. Swatch, the biggest purchaser of polished diamonds, had a gap in its portfolio after a collaboration with Tiffany & Co. (TIF) dissolved into a legal dispute in 2011, according to Rene Weber, an analyst at Bank Vontobel in Zurich.
“Swatch was always missing a jewelry-watch brand and Harry Winston definitely fits into that category,” he said. “After the Tiffany disaster, they now have another brand to expand.”
The stock rose as much as 4.8 percent to a record 516 Swiss francs. They were 3.3 percent higher at 508.5 francs at 12:27 p.m. in Zurich.
The purchase price values Toronto-based Harry Winston at an enterprise value of 23 times earnings before interest, tax, depreciation and amortization, according to Weber. That compares with a ratio of 21 for LVMH Moet Hennessy Louis Vuitton SA (MC)’s acquisition of Bulgari SpA in 2011, he said.
Swatch and Tiffany became embroiled in a legal battle after the Swiss company alleged the U.S. jeweler breached its contract by blocking development of the business. Tiffany said it honored its obligations under the terms of the alliance the two companies began in 2008, when they agreed to develop and sell watches under the Tiffany brand and share the profits. Swatch said in 2011 the venture would shut down within two years.
Swiss watchmakers have been seeking uses for their cash piles as emerging markets fuel luxury sales. Swatch Group, which had cash of 1.13 billion francs ($1.2 billion) at the end of June, is adding Harry Winston to its range of 18 brands, which include Breguet, Omega and Tissot.
The brand’s range of jewelry watches includes a timepiece in the shape of a creeper vine and decorated with 84 carats of diamonds. The company’s Opus 12 watch features 12 pairs of hands to tell the time and consists of 607 parts. Harry Winston had revenue of $412 million from its luxury brands in the year through January 2012. Jessica Alba was seen wearing the brand’s jewelry at yesterday’s Golden Globes film award ceremony, the Daily Mail said.
“It ticks all the right boxes,” said Jon Cox, an analyst at Kepler Capital Markets. “Swatch has been saying for years that they want to get into jewelry and they’ve also been looking to expand in the U.S. Harry Winston isn’t as well-known as Tiffany or Cartier because it has always been much smaller, but it does have a very good position in the high-end market.”
The acquisition includes Harry Winston’s production company in Geneva and 535 employees worldwide. The brand sells through 25 boutiques globally and 190 points of distribution for its watches.
Swatch is unlikely to make any additional large acquisitions for the “foreseeable future” given the company’s aversion to debt, according to Cox. Swatch will probably seek to improve profitability at the U.S. company, he said.
“Harry Winston lacks scale and its margins are lower than other players in this space, so Swatch will work on improving margins by bring up the capacity utilization,” Cox said, adding that he expects the purchase to boost earnings per share by 2 percent in 2013 and 2014.
Harry Winston Chairman Robert Gannicott said the company will make a “sound” return on its investment in the brand. The two companies said they will also consider creating a diamond- polishing joint venture. In addition, Swatch will buy stones from Dominion.
Harry Winston owns a 40 percent stake in the Diavik diamond mine in Canada’s Northwest Territories and Rio Tinto Ltd. owns the rest. The company agreed in November to buy BHP Billiton Ltd. (BHP)’s Ekati mine in Canada and its marketing operations for the stones for $500 million. Gannicott said in June the company was interested in Rio’s stake in Diavik.
The purchase eliminates another large takeover possibility in the luxury market. While Tiffany would be another “very attractive” target, any acquirer would be unlikely to pay a multiple as high as in this deal, according to Kepler’s Cox.
Rothschild advised Harry Winston on the transaction.
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