It seems that just the word “blue” attracts the most money out there in the investment world, as long as it is in the diamond industry.
Famous online diamond retailer Blue Nile has just announced its sale to a private equity consortium this past Friday for “only” $500 million total, a 34% premium to its market value. A premium of this level makes sense when it comes to announced public acquisitions, but the element that did not make sense was the valuation of the company, especially one on the eve of the US Election.
The logo of diamond company Blue Nile Image credit: Blue Nile
Apple should be valued at over $2,000,000,000,000
Blue Nile’s Net Income was at $10.5 million, which makes the sale equivalent to 47.62 times its N.I. Apple’s Net Income was $45.687 billion. Based on this valuation, Apple should be valued at $2.175 Trillion, yes with a “T”. To further support this claim, Blue Nile Shareholder’s Equity was $18.456 million, which is 27.1 times sale value/shareholder equity. Apple’s Shareholder’s Equity is $128.249 billion. Based on this, its value would be $3.475 Trillion!!!!
Does it make sense to value it this way?
Not at all.
So why has Blue Nile sold for $500 million? What value added features does it give its new owners? Is sounds very similar to Facebook’s acquisition of Whatsapp for $19 billion, while Whatsapp had no income. Is there something in the works that we don’t know about?
The logos of Apple, Facebook, and WhatsApp Image credits: Apple, Facebook and Whatsapp
The Internet of Diamonds
There has been a major transformation in the diamond industry, from the mining companies all the way down to consumers and investors. As a result, a deep and careful look has been forced to be made at the essence of the industry itself. Consolidation is the major ingredient for the future success of the industry. Now, less layers are needed between the mine and the market (the consumer). This method of buying a major online retailer like Blue Nile is a simple way of doing it. Imagine that the real buyer behind this acquisition is a global diamond mine player or another major manufacturer. The acquisition in this case would in reality be the traffic that comes to the site on a monthly basis, which is about 2 million per month. That is a lot of business to keep in the hands of a company that also mines, for example.
Value Chain Profitability
We know from Bain & Co.’s yearly report on the diamond industry (Bain & Co. is not one of the parties involved in the acquisition), that the most profits to be made, or ‘value added’, in the industry would be in the diamond trading sector and jewelry. It would take any mining company or diamond/jewelry manufacturer years (at least 10 in my opinion) to establish itself online and brand itself properly before reaching a number like $500 million in sales. However, 10 years is a very long time to wait. What if that entity would be able to pay a premium and then accelerate those 10 years to 2 or 3? How much money will it really save in the end in this were the case? Assuming that a manufacturer works on a 3-5% margin, add the other consolidated layers of trading and jewelry making, which Blue Nile has also been involved with, and now net income would be calculated to be $20-$40 million. That reduces the sale price to 12-25 times net income, maybe even less.
Bain Capital logo Image credit: Bain Capital
Bow Street LLC logo Image credit: Bow Street LLC
Who would be a suitable buyer?
Thinking about who could be the real buyer sends me into various areas in the value chain. One suitable buyer may be Anglo American. With its failed acquisition of De Beers, it needs a boost somehow, and perhaps market consolidation can give it that edge again. Since De Beers is majority white diamonds, and so is Blue Nile, there are some synergies and cost savings, which can help increase net income.
De Beers logo Image credit: De Beers
If we look at the question from the manufacturing angle, one of the prominent players would be Rosy Blue or even KGK, both with the near billion dollar sales figures in the industry. Considering the unfortunate lack of margins in their sector, one way to boost the bottom line would be to skip a layer in the value chain and go after consumers directly. There too there are synergies that can make the acquisition make lots of sense.
Rosy Blue logo Image credit: Rosy Blue
If we look further down the value chain, it may make perfect sense for a competitor to actually come in and acquire Blue Nile, and in doing so, eliminate major competition and in short control the online sales of diamonds and jewelry entirely. One such suitable company may be James Allen. It too, is a leader in the online sale of diamonds and diamond jewelry. If CRM and admin costs are reduced by combining the two companies with similar functions to one, this can bring sales and administrative costs from Blue Nile to near nil, and that will increase the net income by at least $40 million (current sales and admin is $76 million and marketing is in the $24 million range). This can bring net income to $50 million, which would make the sale price only 10 times Net Income.
James Allen logo Image credit: James Allen
The Ballmer Effect
I remember when Steve Ballmer, the former CEO of Microsoft, acquired the Clippers for a ridiculous amount of $2 billion. It too did not make any sense whatsoever, until months later it was discovered that due to some accounting and taxation rules, the final prices ended costing Ballmer only a cool $1 billion. Renewed ad contracts would further reduce the final amount for him. Perhaps this is also a clever case of a tax reduction acquisition of some sort?
image of steve ballmer and clippers…
No matter who ends up buying Blue Nile (perhaps one day we will know who it was when the private equity firms will need to dispose of this asset, and it may be made public), this is a positive event for the whole industry. Perhaps Blue Nile was just willing to be the leader, again!
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