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Swatch-Harry Winston Deal: A Win-Win Situation

Swatch’s $1 bn acquisition of the Harry Winston’s jewellery and watch arm may finally satisfy its jewellery ambitions
Pradip Kumar Saha Mail MeTwitter
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First Published: Fri, Jan 25 2013. 01 40 AM IST
The headquarters of Harry Winston in New York. Photo: Saul Metnick/Wikimedia Commons
The headquarters of Harry Winston in New York. Photo: Saul Metnick/Wikimedia Commons
Updated: Sun, Feb 03 2013. 11 40 PM IST
When the Swatch group announced its $1 billion takeover of the luxury retail arm of Harry Winston Diamond Corp. earlier this month, it hardly came as a surprise to the industry. Speculations were rife for years that Harry Winston would spin off its retail arm, and rumours intensified after reports in October last year that the company had received several expressions of interest.
“It’s like a match made in heaven,” suggested one analyst on a news channel while describing the deal.
Sure enough. On one hand, the deal is seen largely as an opportune moment for Harry Winston to cash out on the luxury watchmaking and jewellery business it bought around six years back, leaving the company with enough cash to dig deeper into what it does best—diamond mining.
At the same time, the deal presents the Swatch Group with the opportunity to re-enter the high-end jewellery segment after it ended a partnership with Tiffany in 2011, resulting in both companies suing each other. Swatch group, the world’s biggest watchmaker by sales, with 8.1 billion Swiss francs sales in 2012, is the only major watchmaker that doesn’t have a high-end jewellery business. The segment is dominated by the Richemont Group with its Cartier brand. Another major player, LVMH acquired Bulgari in 2011, giving it a foothold into the high-margin high-end jewellery segment.
The deal
The Biel, Switzerland-based Swatch Group will buy the New York-based jewellery and watches business of Harry Winston for $750 million in cash and another $250 million in assumed debt, including the 535 employees worldwide and the production company in Geneva (Switzerland). The brand has 25 boutiques for its jewellery and 190 points of distribution for its watches.
The transaction does not include the mining activities of Harry Winston Diamond Corp. After the deal, which is subject to regulatory approval, the mining company will be renamed Dominion Diamond Corp.
The miner will keep supplying the Swiss watchmaker polished diamonds for its watches. The two companies are also exploring opportunities for a joint venture on diamond polishing.
Going back to the roots
For Harry Winston, the deal provides more money to go back to its roots and invest in a business that was more than twice as profitable as the jewellery business. In the fiscal year to January 2012, the latest year for which data is available, Harry Winston reported sales of $290.1 million and operating profit of $48.7 million for its mining unit, compared with $411.9 million and $19.4 million for the jewellery business.
Harry Winston, the first jeweller to lend jewels to actors for the red carpet at the Oscars was founded in 1932 by its namesake. Winston was born in 1896 to an American father and a Ukrainian mother. While growing up, he worked at his father’s jewellery shop and, legend has it that young Winston, at age 12, recognized a two-carat emerald at a shop, bought it for 25 cents and sold it for $800 two days later. He is also famed for donating the Hope Diamond to the Smithsonian Institution in Washington.
In 2004, Canadian miner Aber Diamond Corp. bought a controlling stake in the famed jeweller and, in 2006, it completed a full takeover of the New York-based firm. The company changed its name from Aber Diamond Corp. to Harry Winston Diamond Corp. and listed itself on the New York Stock Exchange in 2007.
“At the time that we purchased the Harry Winston brand, resource investment opportunities for diamonds were rare and expensive following the euphoria of the Canadian diamond discoveries, and the involvement of the large international mining companies,” Harry Winston Diamond Corp.’s chairman and CEO, Robert Gannicott, said in a statement.
“Today there is a range of diamond resource opportunities while the value of heritage luxury brands has increased dramatically. This transaction represents a sound return on our original investment. It will leave us well equipped to realize upstream opportunities in an environment where cash has become a strategic resource while preserving and expanding our relationship with the downstream diamond business.”
In plain speak, the group is seeking to focus on the diamond mining business, and was lucky enough, in the economic climate, to sell off its consumer-facing business at a great price.
The company is interested in buying the 60% stake of the Diavik mine in Canada that it doesn’t already own from Rio Tinto Group, Bloomberg quoted Gannicott as saying. The Australian mining giant has, in the past, said that it wants to pull out of diamonds.
Also, Harry Winston agreed in November to buy BHP Billiton’s 80% stake in the Ekati mine in northern Canada as well as its global sales and sorting operations.
The deal also pitches the miner directly against the likes of De Beers and provides an alternative to investors looking to enter diamond mining.
Filling the void
For the Swatch Group, the transaction, which is the biggest in the Swiss watchmaker’s history, fills a big gap. It gives them the presence they were sorely missing since a break-up with Tiffany in the high-end jewellery segment.
Swatch Group’s chairwoman, Nayla Hayek, said the addition of a jewelry-watch brand “brilliantly complements the prestige segment” of Swatch’s portfolio, helping it compete against luxury watch makers.
Gannicott added, “The Harry Winston brand now has a new home that can provide the skills and support that it deserves to realize its true potential.”
For Swatch, the Harry Winston brand has the potential to generate more than 1 billion Swiss francs ($1.10 billion) in sales and CHF250 million net profit in about 4-5 years, Reuters quoted Swatch chief executive Nick Hayek as saying.
“If watches continue to grow as dynamically as in 2012, 9 billion francs sales are within reach in 2013. Now in view of this acquisition, it can of course be even more,” said Hayek.
Swatch was originally intended to re-capture entry level market share lost by Swiss manufacturers during the aggressive growth of Japanese companies such as Seiko and Citizen in the 1960s and 1970s and to re-popularize analog watches at a time when digital watches had achieved wide popularity.
Founded by Lebanese entrepreneur, Nicolas G. Hayek, by merging several watchmakers in the later half of 1980s, the Swatch Group is the world’s biggest watchmaker and owns some of the best known names in timekeeping, including Omega, Tissot, Blancpain, Breguet and Jaquet Droz.
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First Published: Fri, Jan 25 2013. 01 40 AM IST