Graff Diamonds – which styles itself as maker and retailer of the “most fabulous jewels in the world” – has just filed its application to listing with the Stock Exchange of Hong Kong. This means that the offer process for its long-awaited IPO should normally start in about 10 to 12 weeks – which should put it on track for a late spring – early summer listing.

There is considerable buzz about the listing of this ultra-high-end jewellery retailer (items at its sole Hong Kong shop, at The Peninsula, start at US$100,000).

The proposed flotation of the company, founded in the 1960s by Laurence Graff (whose wealth was estimated at US$3.2 billion by The Sunday Times in 2010) will come hot on the heels of recent listings in Hong Kong by major luxury and consumer brands. The IPO, led by not less than four major investment banks – Credit Suisse, Deutsche Bank, Goldman Sachs and Morgan Stanley – could also be one of the largest in the territory in 2012 by an issuer not from the mainland.

The group is involved at the very top-end of the jewellery spectrum. But it is smaller, and with a narrower footprint, than Tiffany or Chow Tai Fook Jewellery, with which it will inevitably be compared. These are currently trading at price-earnings ratios in a range of about 18 to 20 times 2012 earnings.

Graff Diamonds, however, is a lower volume business. Its profits come from slowly selling an inventory (mostly diamonds). It is a higher-margin retailer that makes its money turning over gems at a significant mark-up.

In theory, the deal has a lot going for it. As a large, liquid and highly visible transaction, it is widely anticipated by market participants.

Graff Diamonds’ original flagship store is in New Bond Street in London but the business is now a global diamond and jewellery concern that spans some 30 outlets. 11 of these are in Europe, 13 in North America (of which seven are located within Saks stores) and one in South Africa.

The group’s presence in Asia, however, remains more modest, with five stores only, generally in Peninsula hotels. Further openings are planned this year in Hangzhou and Macau – as well as at the Burj Al-Arab in Dubai.

So key to the success of the IPO – and to maximizing value – will probably be the ability of management to paint a convincing Asian, and especially greater China, strategy and equity story.

It’s also unclear at this stage what businesses will be included in the entity to be listed. The retail arm of the group reportedly posted sales of US$437 million, with a pre-tax profit of US$86 million, in 2010, according to the New York Times. The rumored offer size of US$1 billion equivalent suggests that other interests might be injected, although the IPO could – as is often the case – take the form of a significant raising of new money through the issue of new shares. In such a case, investors will pay particular attention to the use of proceeds – and reason behind the offering.

In addition to his ownership of the retail network, Laurence Graff is the controlling shareholder of South African Diamond Corporation (SAFDICO) a diamond wholesaler with operations in South Africa, Belgium, the United States and Botswana. The group also owns a minority stake in Gem Diamonds, a company listed in London and capitalized at about US$525 million.

Given the linkages between some of these companies, it could perhaps be more practical to list the group as a whole, rather than one of its component parts (which would then need to comply with a slew of rules in relation to transactions with related firms).

It will also be interesting to see the market’s response to Graff’s gamble to list in Hong Kong, rather than in London. A number of luxury brands have flagged their interest in following Prada’s footsteps in Asia – but few so far have actually crossed that bridge. Chow Tai Fook’s disappointing price performance since its listing last December (with the stock down 11 per cent at the time of writing) could perhaps also weigh on the outcome of the deal, especially in relation to retail investor demand.

It’s still early days, but a good early indication will be commitments made by cornerstone investors closer to launch. The lead banks will no doubt already be hard at work to canvass these – on the back of the draft prospectus.

Philippe Espinasse worked as an investment banker in the US, Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. He is the author of IPO: A Global Guide, published by HKU Press.

[This article was originally published in The South China Morning Post on 27 February 2012 and is reproduced with permission.]

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