On Monday, Swatch Group announced that it will acquire the Harry Winston brand and all activities related to jewelry and watches for $750 million plus up to $250 million in pro forma net debt. The transaction should close in four to five weeks.
From a top-line perspective, Harry Winston fits nicely into the prestige segment of the Swatch portfolio, and with roughly 20 retail locations at this point, there is plenty of runway for steady, measured growth (both in volume and price). It’s still quite early in the strategic planning phase, but management believes that the new business has the potential to generate CHF 1 billion in annual sales and CHF 250 million in net profit in four to five years. The addition of the Harry Winston jewelry business (the majority of company sales) represents an opportunity for Swatch as well, but this isn’t likely the primary motivation behind management’s move.
The price tag appears to be in line with that of other luxury transactions at an estimated 14 times forward EBITDA. But, the top-line opportunity notwithstanding, Swatch is in a unique position to realize significant operational synergies. Several potential benefits include: (1) preferential real estate expansion and placement, (2) lower production costs through economies of scale, and (3) the ability to leverage Swatch’s size in global advertising and marketing, each of which could begin to flow through the financials in the coming years.
One source of investor concern could be the notion that Swatch’s management just doesn’t have many places to put its cash to work, and that it is simply buying growth instead of seeking an adequate return on its investment. Instead, we’d point to the firm’s long-term strategy and history of execution, which we believe is fundamentally solid. Management has been both deliberate and prudent when making capital-allocation, product-development, and retailexpansion decisions.
For example, its choices to invest heavily during the 2008-09 downturn and take a conservative stance on price increases during 2011 and 2012 support this view. Next, with a well-diversified portfolio of nearly 20 brands (five alone are approaching CHF 1 billion in annual turnover) and a vertically integrated business model, Swatch is a well-engrained cog in the industry.
After trading in the CHF 400 range for the better part of 2012, shares are up 35% in the last three months alone. Management is optimistic that it can continue to grow organically in 2013, don’t expect a smooth ride as further economic turmoil in Europe (35% of sales) and uncertainty in China (37% of sales) represent key risks.
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