A Penny for De Beers
The pending sale of De Beers by Anglo American is forcing the diamond trade to confront some harsh realities. The proposed ownership structure should also give industry stakeholders pause.
The reported valuation is not a good look for the company or the industry.
Anglo has a carrying value of $2.3 billion for De Beers, while reports suggest bids are coming in at around $1 billion. It is not clear how that valuation was reached. Whatever the final figure, it is a far cry from the roughly $13 billion valuation implied by Anglo’s 2012 purchase of the Oppenheimer family’s stake which raised its holding to 85%.
At a valuation of $1 billion, or even $2.3 billion, the sum of De Beers’ individual parts might be worth more than the whole.
Perhaps Anglo could get more by selling some of De Beers’ assets separately. These could include De Beers’ 50% stake in Debswana, which owns the Jwaneng and Orapa mines in Botswana; its Namibian operations; Element Six, the group’s synthetic diamond and abrasives business; and the group’s inventory. Add to that the loss-making Venetia mine in Southy Africa and Gahcho Kué in Canada, along with the retail business. The value of De Beers’ intellectual property would also need to be assessed, including A Diamond Is Forever, Desert Diamonds and other campaign assets.
De Beers’ ownership structure, including Botswana’s minority stake and its network of joint ventures, arguably made such a sell-off too complex. Anglo would also struggle to maximize value through separate sales in the current market. Botswana might consider buying De Beers’ stake in Debswana but would likely seek a discount. The same would likely be true in Namibia. Of the remaining assets, Element Six appears the most promising.
Valuing De Beers’ unprofitable retail unit, Venetia and Gahcho Kué will be challenging, and the new owners will face tough calls on all three regardless of how the deal evolves. They are likely to bring Gahcho Kué’s closure to next year and seek a buyer for Venetia while operations remain suspended. Venetia may prove difficult to sell, given its lower-value production and high capital requirements.
Meanwhile, the decision on De Beers London may offer the clearest indication of the new owners’ long-term vision for the group. The company’s failure to translate its powerful brand into a stronger position in the luxury market remains a stain on De Beers’ management over the past 25 years. Yet, the retail business may still have a role to play in the group’s future.
A Diverse Consortium
An asset sale would also spell the end of De Beers itself, which may be one reason that route was never seriously considered. Still, it is worthwhile to examine where De Beers’ value lies and consider what the industry might look like with the company playing a diminished role.
The buzz surrounding the prospective new owners suggests the trade is struggling to fathom such a scenario and continues to be over-reliant on De Beers for industry leadership and stewardship.
The Global Diamond Consortium (GDC), said to be the frontrunner to buy Anglo’s shares, includes an ever-growing group of investors. Led by Gareth Penny, De Beers’ former CEO and chairman of investment firm Ninety One, the consortium already includes sightholders Diarough and Pluczenik, and potentially Rosy Blue, Rapaport reported in April. Last week, Bloomberg reported that Richemont, the luxury group led by South African tycoon Johan Rupert, and Signet Jewelers, the largest jewelry retailer in the US, were in talks to join.
Angola and Namibia have also expressed interest in acquiring minority stakes, while Botswana is seeking to raise its shares in De Beers from 15% to about 25%.
Many in the diamond industry view the broad investor base positively, seeing it as a way to bring together interests from across the market. The consortium is made up of Penny, drawing on his experience running De Beers; midstream manufacturers that buy its rough; retailers and luxury jewelers that sell finished jewelry; and governments with strategic interests in the company’s assets.
Some online discussions suggest the industry views the broad ownership structure as a gathering of experts capable of saving the sector.
That may be part of the plan, but it will be a secondary goal. This is not a coalition formed to develop industry programs. It is a group whose main priority will be to turn De Beers around as a business.
Investor Expectations
The two goals are intertwined. De Beers’ growth strategy has historically focused on stimulating demand for the diamond category rather than promoting its own branded products. And it stands to benefit from doing so again. But GDC faces a different market reality and industry structure. Penny’s immediate task will be to turn around the company, making the cuts and structural changes needed to put it on a sustainable path to profitability as the industry consolidates and becomes more efficient and streamlined.
A broad investor base could give Penny access to the capital needed to implement changes, fund major projects such as the planned underground expansion at Jwaneng and support De Beers’ category marketing programs.
However, the consortium’s broad representation also brings together investors with diverse interests and expectations about what each hope to gain from the investment.
Do sightholders expect preferential access to De Beers rough and more competitive prices? Are Richemont and Signet, as retailers, looking to protect their brands and lift their margins through greater vertical integration, particularly since Signet is already a sightholder? Is Richemont also seeking to secure supply, including access to higher-quality diamonds from Botswana and Namibia? Governments, meanwhile, will prioritize national returns, economic growth and strategic positioning.
This points to a more streamlined and integrated supply network, but one that could raise concerns about conflicts of interest. De Beers has a history of controlling supply through a closed network of buyers and secondary distributors. Bringing some of those buyers into the ownership group could revive old concerns about who gets access to rough and on what terms.
De Beers has already reduced the number of sightholders it supplies. This reflects the shrinking volume of rough available through its sales channel, as production falls and Botswana takes an increasing share of Debswana’s output for independent sale through the Okavango Diamond Company.
At a time when the industry itself is shrinking, the makeup of the consortium could add to consolidation, strengthening select companies across the supply chain.
Penny’s Record
That brings us to Gareth Penny and what his interest might be in taking ownership of De Beers.
Penny was groomed in the Rhodes-Oppenheimer tradition. A Rhodes scholar, he began his career in the 1980s as personal assistant to Julian Ogilvie Thompson, then chairman of Anglo American and De Beers. He went on to establish the Teemane diamond-cutting factory in Serowe, Botswana, on behalf of Debswana Diamond Company. In 1999, he was appointed manager of De Beers’ strategic review, which led to the Supplier of Choice program. (See JCK’s 2003 Person of the Year: Gareth Penny.)
As managing director of De Beers Group from 2006 to 2010, Penny oversaw three landmark developments that had a far-reaching impact on the diamond market, one that is still felt today.
The first was the end of De Beers’ agreement to buy rough diamonds from Alrosa, which covered about half of the Russian company’s output. Following a 2006 European Commission decision, purchases were phased out and ended in 2009, marking a further retreat from De Beers’ historic role in managing global rough supply.
He also championed Supplier of Choice and oversaw the development of the company’s Forevermark brand. Both initiatives drew criticism across the diamond and jewelry trade, and neither proved sustainable in its original form.
Criticism of the two brand-related initiatives focused on their approach rather than on Penny’s reading of the market.
As consumers became increasingly brand focused, he correctly recognized the need for a more competitive branding environment in the diamond market. But the initiatives he introduced to address that need were flawed in their design.
Supplier of Choice tied rough allocations to sightholders’ development of downstream branding and marketing programs, an area outside their manufacturing wheelhouse. Forevermark was De Beers’ own brand, developed with the involvement of stakeholders across the diamond industry, but it struggled to gain traction at retail and, for much of its history, did little to leverage the De Beers name, either for itself or for participating jewelers.
Together, the two initiatives were the vehicles through which De Beers shifted away from traditional category marketing and toward branded programs.
Gareth’s Challenge
From the outside, Penny appears to have unfinished business at De Beers.
His turnaround plan will likely involve renewed investment in category marketing, alongside efforts to streamline and simplify the company, build its brand in the luxury retail market, and adapt to lower supply levels shaped by market and geopolitical realities.
While those efforts already form part of CEO Al Cook’s ‘Origins’ strategy, Penny will likely take additional, more radical, measures. More importantly, he’ll be looking 10, 20 and 30 years down the line, whereas Cook’s mandate is effectively structured around five-year increments, with the current cycle running to 2028.
Pulling off such a turnaround would give Penny the opportunity to address the missteps he made at De Beers in the late noughties. It will require him to balance the diverse interests likely to be represented on the board and build support across the industry. Penny is already positioning himself as an industry unifier through the investors he has assembled in his consortium, his view of the chairman’s’ role (see Interview on Enter the Boardroom podcast), and his appealing oratory style (see Address to Cibjo congress by Gareth Penny).
He would be taking on the task in a vastly different, less centralized diamond market from the one in which he grew up. The industry will continue to consolidate, forcing each business to demonstrate its added value. There simply isn’t enough trading volume or margin to sustain the number of players De Beers enabled in the past.
The market now rewards individual companies rather than the collective, a radical shift from the way the industry operated for more than a century. It is therefore likely to become less reliant on De Beers, and the diamond trade should temper its expectations of what GDC can deliver on behalf of the broader industry.
Ultimately, Penny’s mandate will be to demonstrate De Beers’ value as a business, just as every other company must. Those that succeed will collectively help lift the market through their individual excellence and effective collaboration that builds on it. De Beers will no doubt play an important role.
That is very different from expecting a closed group of investors to rejuvenate the industry. Besides, given Penny’s past record, the jury is still out on whether he is the right person to steer De Beers’ next chapter.
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