Gemfields Acquisition of Faberge Adds Downstream Quality

Gemfields (GEM.L) has announced the proposed acquisition of Fabergé. The company woudl combine exceptional growth opportunities and expansion in both rough coloured gemstone production and a global retail business in the luxury goods market with a major brand and a unique and historic heritage. The deal is subject to several conditions and is expected to complete in Q113. Thus, unless specified, all the forecasts, data and the valuation in this note refer to the pre-acquisition basis.

Fabergé acquisition
The conditional deal will give Gemfields a 100% interest in Fabergé through the issue of up to 214m Gemfields shares. This values the purchase at c £89m (US$142m) at a 30-day weighted average share price. Fabergé reported revenue of US$6.97m for the year to 31 March 2012 and is expected to have over US$10m net cash at the
completion date. The enlarged company intends to apply for listing on the LSE Main board and major shareholder Pallinghurst’s interest in Gemfields will increase from 33% to 49%

Background
The Fabergé brand was originally established in Russia in 1842 and was acquired by Gemfields’ major shareholder, Pallinghurst, in 2007 and subsequently the brand’s business, licences and trademarks were established. The company has been expanding rapidly and five boutiques or concessions have been opened in Geneva, London, Hong Kong and New York. There are plans to open 20 new stores (wholesale 26%, retail 74%) over the next 10 years.

Gemfields production update
Gemfields is now a leading coloured gemstone producer and has created a benchmark in production, grading and marketing of ethical emeralds, which is soon to be complemented by a ruby operation. Production data for Q1 of the 2013 financial year showed increased production, higher average grade and lower unit costs than the previous quarter. We estimate current net cash at c US$35m. Management states that demand for ethical emeralds remains firm across all major markets.

Valuation: 57.5p
Our model and valuation of 57.5p will remain unchanged (see our note Longevity and growth to come, published 15 November) until the proposed Fabergé acquisition is approved. The short-term impact may be dilutive at the group profit level, but the longer-term benefits could come from the ambitious expansion plans for the Fabergé
brand, which could add to profit growth for the combined group.

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