ZURICH/LONDON Switzerland's Swatch UHR.VX has agreed to buy the high-end jewellery arm of Harry Winston HW.TO in a $1 billion deal which expands the watchmaker's luxury offering and leaves the Canadian group to concentrate on its diamond mines.
The move - for $750 million in cash plus the assumption of some $250 million of debt - gives Swatch one of few available luxury jewellery brands, a marque name-checked by Marilyn Monroe and favored on the red carpet by Elizabeth Taylor and other Hollywood stars.
It is the latest deal in a luxury sector which has seen company revenues swollen by Asia's appetite for handbags, watches and other high-end items.
Swatch Group is already the world's biggest watchmaker by sales, with 8.1 billion francs sales in 2012 thanks to brands such as Omega and its colorful Swatch plastic watches.
For Harry Winston, the deal reverses a 2004 link-up between jewellery and mining, after the acquisition of the luxury brand by the mining company that discovered what became Canada's Diavik diamond mine - now 60-percent held by Rio Tinto (RIO.L).
The original mining arm, one of the largest listed pure diamond miners, will be renamed Dominion Diamond Corporation, and, flush with Swatch cash, could prove a key player in a consolidating diamond mining industry.
Harry Winston, which has been considering the sale of the luxury arm for months, bought the EKATI mine from BHP Billiton (BLT.L) last year. It is also expected to consider Rio's diamond mines - including the stake in Diavik - after the mining giant said it could pull out of diamonds.
A sale by Rio would be one of the biggest asset sales in the diamond sector to date, potentially shaking up an industry still dominated by Anglo American-owned (AAL.L) De Beers and Russia's Alrosa. Rio has three mines and a development project - in an industry that gets most of its production from just 20 mines and where no large discovery has been made for more than 15 years.
"With Harry Winston, the focus was going to be moving back to mining, so getting a good price (for the luxury arm) was key to that. This price facilitates the acquisition of EKATI, but also creates something of a war chest for future acquisitions," Charles Stanley analyst Kieron Hodgson said.
Harry Winston's shares jumped more than 10 percent in early trading in Toronto, though later pared some gains, while Swatch was up 4 percent at 1520 GMT.
For Swatch, the Harry Winston brand has the potential to generate more than 1 billion Swiss francs ($1.10 billion) in sales and 250 million net profit in about 4-5 years, Swatch chief executive Nick Hayek told Reuters in an interview.
This deal - at a valuation which analysts said was broadly in line with the luxury sector and LVMH's acquisition of Bulgari in 2011 - allows it to break into high-end jewellery, a market dominated by Richemont CFR.VX with its Cartier brand.
"If watches continue to grow as dynamically as in 2012, 9 billion franc sales are within reach in 2013. Now in view of this acquisition, it can of course be even more," said Hayek.
It is Swatch's latest attempt to get a foothold in high-end jewellery, after a partnership with U.S. group Tiffany (TIF.N) ended in 2011 with the companies suing each other.
Swatch Group and the renamed Dominion Diamond Corporation will continue to work together through a diamond sourcing deal, under Monday's purchase. The two companies will also consider opportunities for a joint diamond polishing venture - Swatch is the world's largest consumer of polished diamonds.
"From a strategic perspective it is positive - Swatch Group has long said it wanted to expand in jewellery," Kepler Capital Markets analyst Jon Cox said.
"At first glance it does not look cheap, but that is probably more a reflection of the profitability of Harry Winston at this stage, which is in ramp-up stage in terms of expansion."
Reuters reported in October last year that Harry Winston was considering splitting off and selling its watch and jewellery business. At the time, analysts put the value at around $770 million, but said they expected a premium.
Harry Winston was made famous by Marilyn Monroe's reference in her song "Diamonds are a Girl's Best Friend", from the film "Gentlemen Prefer Blondes". Every year the firm lends out hundreds of millions of dollars' worth of jewels to movie stars.
Its strong position in the U.S. and Japanese markets is a draw for Swatch Group, Hayek said, adding that he also saw a lot of potential for the brand in Europe.
Citi analysts said they expected earnings before interest, tax, depreciation and amortization (EBITDA) at Harry Winston's luxury unit to rise to 15 percent in the full year ending in January 2014 from 8 percent two years earlier, implying an enterprise value to EBITDA ratio of 13.5 percent.
"(This) appears to be reasonable compared to recent deals in the sector," Citi analyst Thomas Chauvet said.
Vontobel's Rene Weber called the purchase "a great fit for a high price". Under Swatch Group's ownership, the share of watches at Harry Winston should rise to 40-45 percent from about 25 percent currently and profitability should increase, he said.
Rothschild advised Harry Winston on the transaction
(Additional reporting by Euan Rocha in Toronto; Editing by David Holmes, David Stamp and Giles Elgood)