The group hopes to raise £155m through a premium listing in London in the early part of June, implying a market value of £600m-£800m. We do know that the free-float will be around 25 per cent following admission – so minority holders will have limited influence.
Not so for Apollo Global Management, the private equity group that will retain a controlling stake after the public sale. Doubtless Apollo will face the charge that it is simply cashing out through a public offering; not an unreasonable claim given the narrow free-float. But part of the commercial rationale is supported by the recent opening of an outlet in New York as the high-end chain seeks to tap into what it considers an “underdeveloped” retail segment across the Atlantic.
It’s telling that the Watches of Switzerland website has a Mandarin language option. The Federation of the Swiss Watch Industry estimates that 22.2 per cent of the CHF21.2bn (£16.2bn) generated through global sales in 2018 was linked to China and Hong Kong, with the Special Administrative Region (Hong Kong and Macau) a principal hub for the watch trade in Asia. Demand in the US increased by 7.2 per cent and the country now accounts for 14 per cent of Swiss watch exports. So it doesn’t necessarily follow that an opportunity for expansion does exist.
At any rate, the aggregate sales figures only tell us so much. It’s worth noting that sales volumes pulled back by 2.3 per cent from 2017 to 23.7m units, but year-on-year volumes improved for watches costing CHF3,000 and above.
The luxury goods market has been on a tear for many years, yet there are signs it may have already peaked. The S&P Global Luxury Index has delivered an annualised return of 11.6 per cent over the past three years, but registers a negative reading of 5.48 per cent over the past 12 months. To an extent, this reflects worsening sentiment in China – and that’s unlikely to improve any time soon given the fractious US-China trade talks under way in Washington.
Commentators have already drawn parallels between the Watches of Switzerland proposal and the ill-fated debut of Aston Martin Lagonda (AML), but whether the purchase of a £3,000 watch or a £125,000 sports car is analogous is open to question, although what’s noticeable is the leverage prior to admission. At the end of last year, Aston Martin’s net debt was equivalent to 2.3 times adjusted cash profit – and that was before last month’s $190m (£146m) placing of senior secured notes. Net debt for Watches of Switzerland, post-listing, is projected at £120m, or 1.56 times; a little more manageable, perhaps, but we think the watch seller is more vulnerable to potential structural changes in its industry.
How can a luxury retailer scale up its operations if its suppliers have other ideas? Last year, the head of Swiss watch brand Audemars Piguet told Reuters that the company aims to totally control distribution by cutting out third-party multi-brand retailers within three to five years. It isn’t alone. Although the lion’s share of Swiss watch sales is still made through third-party channels, industry analysts believe ever more makers will choose to maximise their profits by transitioning to online e-boutiques. After all, a much larger proportion of Swiss watches are sold through conventional bricks-and-mortar outlets than other luxury sectors. Admittedly, Watches of Switzerland generates over half of its revenue from sales of Rolex watches, and the brand has given no indication that it is minded to change its distribution strategy, but if enough high-end manufacturers ditch the traditional model then it might be forced to re-examine its options.
