Summary
According to unnamed sources, Gitanjali Gems wants to acquire Whitehall Jewelers. Gitanjali, a nascent billion dollar Indian jewelry manufacturer, says it's willing to do an $80 million to $92 million deal to expand its presence in the US.
Analysis
According to Reuters UK, Gitanjali Gems (GTGM:BO) plans to buy Whitehall Jewelers. In the report, G.K. Nair was quoted as saying that “[Gitanjali is]…looking to expand” its operations in the US. Presently, Gitanjali owns 97% of Samuels Jewelers, a 97 store jewelry chain with stores in about 18 states. The Indian based jewelry company also owns 100% of Rogers Jewelers, a chain of 47 mall based jewelry stores situated principally in the mid-western US.
Gitanjali Gems was a medium sized diamond manufacturer that specialized in buying, cutting, and polishing rough diamonds in India until about two years ago. Since then the company has embarked on a global strategy to vertically integrate its operation from polished diamond production, jewelry manufacturing, and retailing.
Today, the company operates 2 loose diamond facilities, 5 jewelry factories that supply finished goods to 112 distributors and 1,246 retail outlets in India and the US. In addition, the company now has or is the process of developing 6 SEZ (special economic zones) totaling approximately 130,000 square feet. These SEZ allow the company to minimize handling costs of imported raw material and stocks for both its manufacturing and retail operations in India.
Only about 3% of all retailing in India is classified as organized. The majority is family owned, however, that is changing. Gitanjali has acquired about 11 national jewelry and gift brands which it’s using to consolidate new retail jewelry growth in India. It also has plans to implement a similar strategy in the US, hence its interest in Whitehall Jewelers. According to Gitanjali’s Annual Report the company “expects Samuels [and Rogers] to source a significant portion of their jewellery products from Gitanjali.” If the company was able to acquire Whitehall Jewelers 375 stores, it would likely be the principal diamond supplier to about 518 mall based jewelry stores with a annual turnover of about $475 million.
However, it remains to be seen whether the company can strike a deal with the creditors to buy Whitehall. Longer term, it’s even more problematic if the Gitanjali’s product breadth is sufficiently broad enough to support 518 jewelry stores in the US marketplace. According to unnamed Reuters’ sources, Gitanjali's deal with Whitehall is between 3.5 billion and 4.0 billion rupees. That’s $80.85 million to $92.45 million at current exchange rates. The question is whether all classes of creditors would be better off liquidating the company.
According to court papers the company had $207 million in assets and about $185.4 million in debt. The Gitanjali deal would probably mean unsecured creditors would get pennies on the dollar while secured creditors recouped most of their investment. With Gitanjali the likely beneficiary of Whitehall’s future purchases, trade creditors have little incentive to agree to the deal and would get more if the company was simply liquidated. Another possibility would be to liquidate the existing inventory and sell the Whitehall name and fixed assets to Gitanjali. How much irreparable damage a 90 to 120 day ‘Up to 70% Off’ liquidation sale would do the Whitehall and Lundstrom trade names is an open question.
If Gitanjali is able to buy the stores, it will represent the beginning of a new era in the US jewelry industry or perhaps a return to an earlier time for those that can remember that far back. Zale pioneered vertical integration as it grew to number one status in the 1970’s. Then Zale had its own DTC rough diamond site and operated a loose diamond operation in Tel Aviv. While it didn’t have its own manufacturing factory, it did have its own assembly facilities where it set and finished diamonds and castings purchased from domestic suppliers. The buying arrangement maximized Zale profitability in the beginning, however, the company found vertical integration ultimately lead to poorer retail assortments as in-house manufacturing conflicted with the stores product and marketing programs. How Gitanjali expects to avoid the same pitfalls isn’t clear as is how the company plans to mitigate fall out from its current retail customers as it grows to one their largest competitors.
On paper, Gitanjali appears an overnight success. The company’s sales have grown to more than a $1 billion dollars in the last 24 months. However, just how sustainable that growth is remains to be seen. By US financial standards, it operating margins are very thin, meaning the company doesn’t have a lot of room for mistakes. Up to now much of its new growth has come from the emerging Indian consumer market which is expanding rapidly and is very open to retail change.
However, the acquisition of Whitehall and the subsequent operation of over 500 mall based retail jewelry stores will shift both the opportunity and the consequences of failure to the US market. Positioned in America’s over stores, highly competitive, middle-market, it will take more than Indian brands and skillful manufacturing to make these stores financially successful.
The fact is the mid-market jewelry business in the US today is a zero-sum game and the question remains if the company has the merchandising finesse and financial resources to ‘profitably’ steal a half billion in jewelry business from the likes of Kay, Zale, Helzberg, Fred Meyer, and discounters like Wal-Mart and grow in India too.
