Play on gold as Saudi jeweller sold to private equity

In what is almost certainly the biggest private equity deal in the Middle East so far this year a consortium led by Bahrain’s Investcorp has bought a 70 per cent state in the leading Saudi jewelry group L’Azurde.

Investcorp spent an unspecified sum from its $1.1 billion Gulf Opportunity Fund I to buy 72 per cent of the stake. There are two co-investors in the group: Abu Dhabi’s The National Investor bought eight per cent; and Eastgate Capital Group, the private equity division of NCB Capital, part of the largest Saudi bank acquired 20 per cent.

Of course, we do not know exactly how much the consortium paid, although Reuters said a source close to the deal put the enterprise value at more than $300 million, which would represent a $210 million investment by the private equity groups.

Deal cost

However, without a profit and loss statement it is impossible to evaluate what this means as a multiple of profits. Investcorp said L’Azurde had revenues of more than $500 million in 2008.

But we can hazard a guess that profits would be between 10-20 per cent of revenues. Any less and the private equity group would likely not be interested. Any more and Al Othaim Holding would probably not be interested in selling. That would give profits in the range of $50 to $100 million, and a price-to-earnings ratio of three to six.

L’Azurde has two factories producing jewelry in Saudi Arabia and Egypt and critically the group manages its gold inventory to pass on the gold cost and not to speculate in the precious metal. It made 26 tonnes of gold jewelry last year, selling through 4,200 wholesale accounts and 18 retail outlets across the Middle East.

Gold price play?

This is not at first sight a play on the rising price of gold, which might be thought to be a reasonable investment by regional private equity groups. It is more a play on the assumption of future growth in demand for jewelry in the region.

But the question you always have to ask in such private equity deals is why did the owner sell? According to Forbes L’Azurde is one of the best known brands in the Arab world, and was founded 30 years ago by Abdul Aziz Al Othaim.

With the gold price rising this seems an odd time to sell up. Yet any jewelry company in the Middle East will tell you that as the gold price rises their sales fall, and indeed local jewelry sales have dropped off a cliff recently since the gold price recovery.

Is the Al Othaim family therefore cashing out before global reflation causes a massive hike in the gold price and cripples its business? That would be as logical as a private equity group making a long-term investment in one of the Arab world’s few major brands.