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Swatch Group in $1B Deal for Harry Winston

The move fulfills long-standing speculation that the Swiss watchmaker was looking to complete its portfolio of watch brands with a jewelry property.

PARIS — The Swatch Group Ltd. is buying U.S. luxury jeweler Harry Winston for an enterprise value of up to $1 billion.

The move fulfills long-standing speculation that Swatch was looking to complete its portfolio of watch brands with a jewelry property.

The world’s biggest watchmaker, based in Biel, Switzerland, said it would take over the Harry Winston brand and all its jewelry and watch activities, including its 535 employees worldwide and production company in Geneva. It will pay $750 million for the acquisition and take on up to $250 million of net debt.

Harry Winston, immortalized by Marilyn Monroe in the song “Diamonds Are a Girl’s Best Friend,” is known as the jeweler to the stars, having dressed celebrities such as Elizabeth Taylor, Madonna and Halle Berry. Its founder famously donated the Hope Diamond to the Smithsonian Institute in Washington in 1958.

Despite there being no shortage of glamour and sparkle, the house’s history is also marked by an acrimonious family battle that ensued after the founder’s death in 1978. Sons Ronald and Bruce were each given a 50 percent stake in the company, which was followed by a bitter feud between the heirs and the family trust. In 2000, after years of dispute, Ronald Winston, then-chairman and chief executive officer of the Fifth Avenue jeweler, joined forces with private equity firm Fenway Partners to acquire all outstanding shares of the company for $54.1 million, buying out Bruce’s stake in the business.

Rumors that Swatch Group was circling around Harry Winston have been gaining ground since Swatch Group broke off its agreement to supply watches to Tiffany & Co. in 2011, claiming that Tiffany systematically blocked and delayed the development of the business.

Swatch Group — parent of brands including Omega, Breguet, Rado and Blancpain — is only marginally active in the jewelry segment, mainly through its mid- and low-range brands ck Calvin Klein Jewelry & Watches and Swatch Bijoux.

“Harry Winston does brilliantly complement the prestige segment of the group,” stated Swatch Group chairwoman Nayla Hayek. “We are proud and happy to welcome Harry Winston to the Swatch Group family — diamonds are still a girl’s best friend.”

Harry Winston has a network of stores, which it calls salons, in locations including New York, Paris, London, Beijing, Shanghai, Hong Kong, Singapore and Tokyo. The transaction does not include the mining activities of Harry Winston Diamond Corp., which said it would change its name to Dominion Diamond Corp. once the deal is concluded.

“The company will retain an ongoing relationship with The Swatch Group, one of the world’s largest buyers of polished diamonds, in sourcing polished diamonds for them. The two companies will also explore the opportunities for a joint diamond-polishing venture, bringing together the manufacturing and diamond expertise of the two companies,” Harry Winston Diamond Corp. said.

Analysts said the company’s valuation was relatively steep, but they noted that Swatch Group can afford the investment since it has a net cash position of close to 2 billion Swiss francs, or $2.67 billion at current exchange. Gross sales at Swatch Group rose 14 percent in 2012 to 8.14 billion Swiss francs, or $8.69 billion.

René Weber, analyst at Swiss private bank Vontobel, said he expected the acquisition to boost Swatch Group’s sales by 5 percent and its earnings before interest, taxes, depreciation and amortization by 2 percent in the first year.

He estimated that jewelry makes up 75 percent of Harry Winston’s revenues, and watches 25 percent. “The watch part especially helps to fill the gap for the Swatch Group, as they have really nothing in the high-end jewelry watch segment after the disaster they had with Tiffany,” Weber noted.

François Arpels, managing director at investment bank Bryan, Garnier & Co. in Paris, said the deal puts Harry Winston’s enterprise value at 2.3 times its 2012 sales and 37 times its earnings before interest and taxes. He predicted Swatch Group would rapidly address Harry Winston’s profitability, noting that the jeweler’s EBIT margin of 6.5 percent pales in comparison with Swatch Group’s 24.1 percent.

“They are going to work on the product mix in terms of Harry Winston’s offer, product categories and prices, that’s for sure, and in terms of inventory and marketing — a lot of work is going to go into that,” said Arpels. “Like many other jewelry houses, Harry Winston could complement its hyper-luxury offerings with [more accessibly priced] luxury items.”

Monday’s development briefly sent Swatch Group shares to a record high of 516 Swiss francs, or $564.67.