GEMFIELDS’ Kagem emerald mine in Zambia. In a deal brokered and backed by Brian Gilbertson, the company plans to use Fabergé as a high-end stamp for its gemstones, inflating margins.

GEMFIELDS’ Kagem emerald mine in Zambia. In a deal brokered and backed by Brian Gilbertson, the company plans to use Fabergé as a high-end stamp for its gemstones, inflating margins.

 

Fabergé: from Deodorant to Emerald Mining

Issue 24, December 2012

Shares in Gemfields have fallen 19 per cent in 15 days since the company announced plans to acquire jeweller Fabergé in an all-paper deal, lowering the indicative purchase price from £83m ($133m) to £68m ($109m) and belying a significant juncture for both companies.

Fabergé has long carried a troubled past. Founded by Gustav Faberge in St. Petersburg in 1842, the jeweller rose to fame making jewel-encrusted novelty eggs for Tsar Alexander III, which he lavished on his female relatives.

Nicholas II continued the relationship, but the Bolshevik Revolution of 1917 put a stop to business: the House of Fabergé was nationalised and the Faberge family fled; only one Imperial egg left Russia with its original owner; several were confiscated and sold to US-born oil tycoon Armand Hammer, a personal friend of Lenin’s.

In 1937, American businessman Samuel Rubin registered Fabergé Inc., outmuscling Gustav Faberge’s grandsons for ownership of the name and growing the business into a cosmetics giant, bought by Unilever in 1989 for $1.6bn.

Unilever licensed the name to anything from deodorant to spectacles, until in 2007 the trademark was sold to Pallinghurst, a private consortium led by merger maniac Brian Gilbertson, former chief executive of BHP Billiton.

Gilbertson in turn was backed by aluminium oligarch Viktor Vekselberg, a Fabergé collector who had promised the brand to his wife as a Christmas present. Unlike Vekselberg, Gilbertson was not however hungry for Fabergé eggs. Instead, he intended to create an integrated gemstone house that could add value to a mine’s output. “Imagine a Fabergé gem versus a no-name gem, then take them fifty years into the future and try to sell them at Sotheby’s or Christie’s,” he said. “Which gem will sell for more?”

As the deal closed, Vekselberg was diluted from the consortium. In a more diplomatic move, Gilbertson appointed Gustav Faberge’s descendants to advise the new company, showing an accord with the brand’s origins that previous owners had lacked, whilst legitimising his own group as its rightful heir.

Fabergé has therefore been revived as an “unashamedly expensive” brand, selling jewellery at unlisted prices from boutiques in Geneva, London, Hong Kong and New York.

A physicist trained in missile systems, deals are Mr. Gilbertson’s forte. As chairman of South Africa’s Gencore, he acquired the lossmaking aluminium assets of Royal Dutch Shell in 1994, forming Billiton, which he later merged with Australia’s BHP. Six months later he resigned as chief executive when the board refused his plans to merge with Rio Tinto.

Folding Fabergé into London-listed Gemfields, 63 per cent owned by Pallinghurst, therefore ought to be duck soup for the 69 year-old South African.

Combined, the companies would complete the integrated gemstone house he envisaged. Gemfields’ stones will be invisibly etched with a Fabergé mark, imitating the De Beers ‘Forevermark’, taken as a stamp of quality that bolsters the De Beers brand and the price of its diamonds. Fabergé will gain predictable gemstone supply and the combined group will capture margins from Zambia to Bond Street.

Vertical integration will also ease traceability. Gemfields has positioned itself as a “conflict-free” gem producer from democratically elected countries. In Zambia, the company’s Kagem mine accounts for 20 per cent of all emerald output, whilst its Kariba mine is the world’s largest producer of amethysts. Gemfields bought 75 per cent of the Montepuez ruby deposit in Mozambique last year and has exploration tenements targeting emeralds, rubies and sapphires in Madagascar.

Pallinghurst would own 49 per cent of the combined entity, which management believe would re-rate from a mining multiple to that of a rapidly growing consumer goods group. Before an impairment reversal at Kagem however, both companies are currently lossmaking.

Fabergé, which plans to open two new stores per annum for the next ten years, also faces a period of intensive investment, having swallowed $167m under its current owners.

Emerald prices are meanwhile as volatile as the jewellery industry itself, falling from $43 per carat in July 2011 to $30 per carat last month. In 2009, Gemfields’ high grade emeralds traded for as little as $4 per carat.

Gilbertson has however brilliantly plucked Fabergé from the past, prising it from Unilever and outwitting Viktor Vekselberg, whilst rapidly advancing Gemfields as a gemstone supplier. Like an Imperial egg, Fabergé’s future promises further surprise.

“Imagine a Fabergé gem versus a no-name gem, then take them 50 years into the future and try to sell them at Sotheby’s or Christie’s. Which gem will sell for more?”

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