BREGUET WILL WIND UP WITH SWATCH

Byline: Katherine Weisman / With Contributions from James Fallon, London

PARIS — A day after LVMH Moet Hennessy Louis Vuitton announced its friendly bid for Tag Heuer, the giant Swatch Group revealed Tuesday that it is snapping up luxury watchmaker Groupe Horloger Breguet from Investcorp.
Meanwhile, reports indicate that the Investcorp-owned Ebel sports watch company could be the next takeover target, with several suitors including Swatch eyeing the property.
Purchase price for Breguet was not disclosed, but industry sources indicated that Swatch will pay roughly $130 million for the company, or about twice Breguet’s estimated annual sales of approximately $65 million. Breguet, a profitable company, has operating margins nearing 15 percent, sources said.
Dollar figures are converted from the Swiss franc at current exchange rates.
“We operate in every segment of the watch market and we are taking advantage of every segment to increase production and brand image across our brands,” said Nicolas Hayek, group founder and chairman of Swatch.
Hayek stressed that purchasing Breguet is not an indication that Swatch wants to concentrate its business at the luxury end. Breguet will, however, help Swatch grow in that market, he said. ‘
‘With Blancpain and Omega, we already do some [$650 million] in sales, which makes us number two in the luxury segment behind Rolex,” Hayek noted.
Breguet was founded in Paris in 1775 by Abraham-Louis Breguet. In 1780, he developed the first self-winding watches, putting Breguet on the map as one of the best makers of the most complicated movements for watches. Nearly two centuries later, French jeweler Chaumet bought Breguet, and in 1987, both companies were purchased by Investcorp. Under Investcorp, Breguet’s unit sales grew almost tenfold, Swatch said.
Swatch, however, is buying more than the Breguet brand. Included in the purchase is Montres Breguet SA, which sells Breguet timepieces; Breguet SA, the brand’s French distribution company; Nouvelle Lemania SA, a Swiss firm that produces all of Breguet’s watches and makes high-end mechanical movements for third-party brands, and Valdar SA, a Swiss company that makes and sells micro-mechanical components mainly for the watch and clock industry.
“This deal doesn’t cost Swatch a lot, but it gives the group more capacity and negotiating power for the equivalent of shelf space,” said Michelle Tsang, an analyst with the luxury goods team at Credit Suisse First Boston in London. “In this upmarket segment of the watch industry, there are not a lot of brands to buy and Breguet is a good, solid company. It can be leveraged in Swatch’s current distribution network.
“Plus, it’s better for Swatch to earn money through acquisitions rather than leave money in the bank,” Tsang said. “Breguet will offer more promising earnings.”
Last year, Swatch earned $231.7 million on consolidated sales of $2.14 billion.
But Hayek is not stopping at Breguet. He is out for more acquisitions in the watch business as well as in everything from jewelry to telecommunications, businesses in which the Swatch group currently operates.
“I am ready to buy because I have lots of cash,” Hayek said. “Like Patek Philippe. I want that too, but they’re not ready to sell!”
Hayek also praised the LVMH-Tag Heuer deal.
“Tag is a big client of ours — we deliver their movements,” Hayek said. “We are happy they are in good hands.”
The sale of Breguet leaves Investcorp with only a few remaining holdings in luxury goods and apparel: Chaumet, Ebel and activewear label Helly-Hansen. But an Investcorp spokesman denied that the latest sale represents a continuing withdrawal from the luxury goods market by Investcorp.
“Our last few acquisitions have been away from luxury goods, but that’s because there is less value in the luxury goods sector than elsewhere at the moment,” said the spokesman. “Our investors are driven by a mercenary view and they go where the value is. There has been a lot of consolidation in the luxury goods market and it seems the trend is for large fashion houses to own lots of brands. That makes sense because they get synergies in back-office operations and in real estate.”
“This sale wasn’t a conscious decision to pull out of luxury goods,” he continued. “We’ve owned Breguet for 10 years and found a good exit by selling it to Swatch.”
The Swatch-Breguet transaction also raises the question of what other watch acquisitions can be expected and who the suitors are. The Richemont group, owners of such prestige watch and jewelry brands as Cartier, Baume & Mercier and Piaget, seems markedly absent from the current flurry of activity.
“We don’t really know why. They are sitting on a huge war chest with some $800 million in cash,” said one source.
While many of the Swiss watch firms remain independent, observers find it tough to pinpoint the next targets.
“The industry is not as volatile as, say, Italian-family-owned apparel companies,” laughed one London-based analyst.