BREAKINGVIEWS-Graff's new luxury paradigm hits the rocks

Thu May 31, 2012 10:00am BST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By John Foley

HONG KONG, May 31 (Reuters Breakingviews) - Graff Diamonds cannot be blamed for the falls in world markets which helped undermine its hopes to float shares in Hong Kong. Nor is the family-owned diamond merchant responsible for the poor post-IPO performance of social network Facebook (FB.O), which has left many investors who normally buy new stocks nervously nursing losses. But given Graff’s peculiarities, and the risk aversion stalking markets for well over a year, it’s hard not to feel that the company and its advisers were being overly optimistic in chasing a share offering that would have valued the firm at $4 billion and raised $1 billion of new cash. Investors homed in on Graff’s reliance on a handful of mega-rich customers as a key investment risk. But that wasn’t the only oddity. Another was the fact that Graff was listing in the first place, given the ongoing weakness of markets. It didn't need the money, most of which was earmarked for the company’s founders rather than growth. Expansion could have been funded from Graff’s own cash flows or by raising debt. The IPO gave the company a chance to restructure, but it can also do that in private. The final straw may simply have been too much cleverness. Graff’s pitch relied on convincing investors that its clientele is so high end as to make it unlike any other listed luxury company. That meant buying into a new concept rather than simply measuring Graff against obvious peers like Tiffany & Co (TIF.N) or LVMH (LVMH.PA). In truth, Graff’s valuation of $4 billion looks reasonable, which makes it likely the company will return to the market later. But volatile times don’t suit new paradigms.

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CONTEXT NEWS

- Graff Diamonds delayed its initial public offering in Hong Kong, which would have valued the company at HK$32 billion ($4.2 billion) at the midpoint of the announced price range. At that valuation, Graff aimed to raise HK$7.9 billion ($1 billion).

- The UK-based, family owned diamond merchant blamed “consistently declining stock markets”. Graff was advised by Rothschild. The company’s chief underwriters were Credit Suisse, Deutsche Bank, and Goldman Sachs and Morgan Stanley.

- Reuters: Graff pulls Hong Kong IPO, latest victim of weak markets [ID:nL4E8GU83J]

- Reuters: Graphic: Top withdrawn IPOs worldwide: here

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(Editing by Robert Cole and Katrina Hamlin)

((john.foley@thomsonreuters.com)) Keywords: BREAKINGVIEWS GRAFF

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