Gemfields: Faberge Challenges Ahead

Following the 21 November 2012 announcement and subsequent EGM, Gemfields (GEM.L) completed the acquisition of Fabergé on 28 January 2013. Management states that by extending control over this high-end luxury goods platform with a global brand and exceptional heritage, Gemfields can position itself as a globally recognised coloured gemstone champion. The market will need to absorb the dilutive effect of a substantial increase in issued capital, which downgrades short-term earnings estimates, and assess the ambitious strategy to rapidly expand the Fabergé business.

Fabergé acquisition
The all-share deal gave Gemfields a 100% interest in Fabergé through the issue of up to 214m Gemfields shares. This values the purchase at c £58m (US$91) at the current share price (27p). Fabergé is currently loss-making, but management targets profitability through expansion and cost efficiencies. We estimate that the acquisition could become cash accretive to Gemfields within four years. The Pallinghurst Group now has a direct plus indirect interest in Gemfields of 49.3% following the unbundling of the Fabergé equity holdings in the Rox consortium.

Background and strategy
The iconic Fabergé brand was originally established in Russia in 1842. In 2007, the Unilever-owned portfolio of brands was acquired by Pallinghurst, which subsequently established the brand’s new business, licences and trademarks. Fabergé currently has six outlets covering Geneva, London, Hong Kong, Ukraine, and New York, and the strategy is to open 20 new stores over the next 10 years, with a long-term target of 71 stores by 2033.

Gemfields’ vision
Gemfields has an enviable status in restructuring and expanding a major ethically sourced premium emerald mining operation and creating a benchmark in grading and marketing rough stones. This will soon be complemented by a ruby operation. Management is confident that Fabergé will help accelerate demand for the company’s finest gems by providing a directly controlled international showcase.

Valuation: NPV per share of 47.7p
Our model and valuation for the enlarged company is 47.7p a share (previously 57.5p), reflecting the dilutive short-term impact of the merger. The valuation assumes success of the ambitious expansion strategy for the Fabergé business, with an expectation of continued growth in the luxury goods investment sector. There is a longer-term strategy to apply for listing on the LSE main board.

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