RAPAPORT... The diamond industry has historically maintained a traditional approach to doing business. The abundance of trade shows, methods of payment for product and the conclusion of business transactions are all based on long-established customs. But there is something to be said for breaking new ground. There is one particular business concept I have noticed that, while prevalent in other industries, has not yet taken firm root in the diamond trade. I am referring to public offerings, a method used by a wide variety of businesses to raise capital to more aggressively expand and compete in today’s global market. Frequently employed by the diamond mining sector, public offerings’ economic advantages are gradually attracting more widespread interest.
With industry debt reaching all-time highs of approximately $12 billion, companies in the diamond trade are seeking out alternative sources of financing. Initiatives such as the 15 million euro bond offering by Overseas Diamonds are sure to become more popular in the future, as companies seek larger amounts of working capital. There is no question that the scope of the game has changed, with publicly traded companies such as Gitanjali Gems, Collectors Universe, Sarin and others beginning to utilize the capital available to their organizations to grow their business and incorporate alternative revenue sources.
Blue Nile, a company founded in 1999, currently has a market cap of more than $650 million at its disposal, with immense potential still to be realized. Its latest announcement outlining its expansion plans to include 12 international markets is an example of where its capital is being put to use. Ice.com successfully raised $47 million at the beginning of 2008, on top of a $12.5 million capital injection in early 2006. While one may think such large-scale investments pertain only to the internet, Zales has been attracting a substantial amount of investment capital as well.
Access to impressive amounts of capital can enable a company to grow very rapidly. Gitanjali Gems, an Indian-based sightholder listed on the Bombay and National stock exchanges, is an example of this phenomenon. Many other players, while initially skeptical, have come to embrace its business model and the aggressive vertical integration strategy it is currently pursuing. With its latest purchase of two retail chains in the U.S. — Samuels Jewelers and Rogers — Gitanjali Gems now has an additional 146 stores in which it can sell its product. Although the current retail market in the U.S. is far from ideal, public entities such as Gitanjali Gems have both the necessary capital and the backing of strong currencies to enable them to vigorously pursue continued global growth from a larger business base.
There are, of course, both positive and negative aspects that organizations raising public money must face, and they should be carefully thought through. The required disclosure of detailed financial information might deter some people, given the fierce competition within the diamond industry. Companies may assume considerable risk in expanding rapidly, particularly in today’s turbulent economic environment. However, on the plus side, the amount of capital that can be accessed enables companies to increase the scale of their existing business and compete in the marketplace in a more forceful manner. The real risk involved with pursuing public offerings is that the expansion may not be properly monitored. The industry has seen numerous examples of companies, both public and private, unable to control their rapid expansion and capitalize on all the synergistic aspects the expansion afforded.
Article from the Rapaport Magazine - March 2008. To subscribe click here.