Although $800 million market cap Jostens Inc. is about to be snatched up by a private investment group led by Investcorp, most of the sparkle in jewelry manufacturing M&A has been with smaller companies.

Ken Gassman, a jewelry industry analyst with Davenport & Co., said while jewelry manufacturing deals are few and far between, there is a trend towards consolidation. “There are increasing cost pressures in the diamond industry, as well as among jewelry manufacturers,” he said, adding that, “in order to continue operating efficiently, there is going to be more consolidation among companies.”

Gassman said that most companies in the jewelry industry are small cap players trading at low P/E multiples. He also said that the industry is not heavily followed by Wall Street. Moreover, the jewelry industry is not forthcoming in disclosing information about itself, he pointed out. These factors help explain why the majority of jewelry manufacturing stocks are trading below book value, he said.

“The jewelry industry just isn’t sexy and glamorous in Wall Street’s eyes, which is ironic, given the products that it sells,” he said. Gassman added that jewelry manufacturing stocks typically trade at a multiple of nine to 10 times earnings. “The jewelry industry does not use multiples of EBITDA because the financial operating characteristics are somewhat different from other retail and manufacturing companies,” he said.

As an example, Gassman said many goods in the jewelry industry are sold on consignment, making the accounting practices more involved for the industry.
In aggregate, the U.S. jewelry industry generated approximately $23 billion in annual revenue. And Michael Crawford, an equity analyst with B. Riley & Co., said that most of the activity in jewelry manufacturing consolidation has come from smaller companies.

“You have smaller players such as Michael Anthony Jewelers Inc. (MAJ) and OroAmerica Inc. going after the smaller, usually private, companies and typically not paying much more than book value.”

Crawford said that Burbank, Calif.-based OroAmerica has been one of the more acquisitive companies in recent history. The company’s last acquisition was less than two years ago, when it acquired Jene-Karat Gold Jewelry. In February 1999, the company sought to acquire Mount Vernon, N.Y.-based MAJ, for roughly $64 million, or $6 per share, cash. Michael Anthony, however, rejected the offer.

“I believe MAJ once put a bid for OroAmerica in the past, so the two companies have a long history between them,” Crawford said. With regard to OroAmerica’s bid for MAJ was fair, Crawford said the answer depended upon which perspective you were coming from, given the fact that the company is presently trading at less than half of its book value, which currently stands at roughly $6.75 per share. At press time, MAJ’s stock closed at $2.75.

Allan Corn, MAJ’s chief financial officer, said that the trading of jewelry manufacturing companies at sub book value is making the M&A process difficult. “Most of these companies are trading at 10 time earnings, and probably 50% below book value,” he said.

Corn added that though a potential acquirer might offer a bid that is at a premium to the jewelry manufacturer’s stock price, it is usually below the company’s book value. The book value of most jewelry manufacturing companies “is a book value of hard assets, and you are not getting any multiple for the going concern business,” he said. Most privately held companies view their value at a much greater level than what the market attributes to publicly traded companies, he pointed out.

Shiu Shao, OroAmerica’s chief financial officer, did not return phone calls seeking comment.
Crawford said that most deals in the jewelry manufacturing industry, like the proposed offer for $20 million market cap MAJ, are cash transactions, because companies such as OroAmerica are trading at a discount. It does not make sense to do a stock deal because a company is not going to get a premium, he said. He believed the only time one would see a stock deal in the jewelry manufacturing industry is if the acquiror had some high-priced “Internet” stock that could be offered in a share exchange at a significant premium.

Gassman said, however, that it would be some time before the Internet makes a substantial impact on jewelry manufacturing industry, because it will be more difficult to “sell unbranded or blind’ jewelry items, where customers have little or no product knowledge.”

Josephthal & Co. analyst James Barrett said the Jostens buyout was a unique situation. Investcorp saw “a dominant franchise, a very high level of surplus cash flow, and a business that had some interesting opportunities on the Web as well,” he said. He also said that Jostens was purchased at very low multiple of cash flow, 6.5 times EBITDA.

Barrett added that there are few companies that are in the same business as Jostens, so there are no comparable transactions to gauge it against. “You have to look at it on a stand-alone basis,” he said. According to the terms of the deal, shareholders will get $25.25 per share cash for approximately 98% of Jostens’ outstanding shares.

Jim Hoesley and Cary Kochman, the Credit Suisse First Boston bankers leading the firm’s work for Jostens, were unavailable for comment.