LESS than six months ago, Graff poached a top executive from a rival. He was enticed by the promise of a “sizeable” package when the exclusive jeweller floated this summer in Hong Kong. He wasn’t the only one expecting to make millions from the float valuing the firm at $4 billion (£2.6 billion) — Laurence Graff, the founder, stood to make $200m.
On Wednesday evening — one day before the fundraising was set to close — the float was pulled. With that, everyone’s dreams of making millions came crashing down.
For bankers with time to spare, it was a chance to show off their creative skills. Hours after the announcement, an email entitled “Diamonds are clearly not forever” was winging its way around the City. “Sad that too many said Dr No,” mocked the email. “Mr Graff has had a Skyfall back to reality. He must want a Licence to Kill his underwriters.”
It was a humiliating retreat for the 73-year-old, who started as an apprentice in Hatton Garden, London’s diamond district, and rose to become Britain’s “king of bling”. It also raised questions about the boom in luxury goods. For years companies such as Hermès and Prada have been bounding ahead despite the economic carnage.
So are the good times over? Or was it that Graff, which operates in a different price stratosphere to Burberry and even Louis Vuitton, was just too rich for investors to digest?
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For Graff himself, the experience was novel. His Midas touch had never failed since he founded the business 52 years ago. His fortune is £3.3 billion, according to The Sunday Times Rich List, after years of paying himself big dividends. The listing would push up his wealth even more.
Yet it was the company’s greatest asset — its exclusivity and astonishing price tags — that proved its undoing. The float documents showed that Graff’s top 20 customers accounted for more than 40% of last year’s turnover, as revealed by The Sunday Times a fortnight ago. One customer, thought to be a Thai billionaire, accounted for more than 13% of last year’s total sales of $755m.
“There can be no assurance that any of our existing customers will continue to purchase our jewellery at historic levels or that other existing or new customers will make up any potential decrease in sales,” the prospectus warned.
The brand was simply too exclusive. “It might have been a different story if Graff was a brand with a much larger and more diverse customer base,” said Jason Rawkins, partner at Taylor Wessing, a law firm. “Some luxury brands, such as Burberry, which has been particularly successful in recent years, achieve this diversity by offering different levels of their product ranges, from the very exclusive to the more affordable.”
The lowest price tag at Graff is about £10,000 for a pair of cufflinks. Most customers, who include Oprah Winfrey, Donald Trump and the sultan and queen of Brunei, typically spend about £100,000 on a piece. A typical transaction at Cartier is about a tenth of that.
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Graff’s handful of super high-rollers contributed the lion’s share of its $143m 2011 pre-tax profits. They would easily and regularly splash tens of millions on a single stone. Graff himself was at the centre of all these big deals.
“He would walk into a room with a bunch of diamonds in his pocket — they’d be worth £10m each,” one hedge fund manager said. “And he would say to the emir or prince, ‘Your wife would want this £20m pink diamond. It will look fantastic on her neck or finger, or in your safe’.”
Not only did the succession issue niggle, but the secrecy that shrouds the business made it next to impossible for investors to get a true grasp of its earning potential. One analyst said: “Graff knows his customers but he can’t tell the outside world who they are or how the model operates. He says, ‘This is a great stone, it’s unique and you need to have it,’ but how do you put a forward earnings model on that conversation?”
In the end, investors couldn’t get enough comfort and the share issue, aiming to raise $1billion for 25% of the business, was only half sold. Clauses within the deal, such as the one transferring the group’s property leaseholds to Graff, thus guaranteeing a hefty rental income, may also have irked investors. A rival said: “He was cashing in but still keeping a majority stake. It was a lot like trying to have your cake and eat it.”
The company “postponed” its float, blaming “consistently declining stock markets”. Had Graff gone to market a year ago — when Prada’s shares soared on the Hong Kong stock exchange — it might have been a different story. But today, with Europe mired in crisis and no end in sight, is not the best time for a business like this.
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There are other signs that the luxury bubble fuelled by the seemingly insatiable appetite of Chinese consumers may have burst. A bottle of Chateau Lafite now sells for $1,100 in Shanghai, down 50% from its peak. Hong Kong sales by Christie’s, the auction house, in the year so far have fallen more than 30% compared with the same period last year.
This trend is being reflected in the performance of company shares. Baoxin, a Chinese luxury car dealer, and Hengdeli Holdings, a luxury watch seller, have seen their shares fall 30% since May 1.
The banker who circulated the pun-laden email last week was not on the list of Graff’s advisers and underwriters. “There but for the grace of God,” he wrote. Potential investors may be feeling the same way.