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Will Harry Winston investor Starboard spur retail spinoff?

Toronto-based Harry Winston Diamond was created as it exists today in 2006, when Canada’s Aber Diamond Corp. acquired Harry Winston Inc., the 70-year-old legacy of a U.S. jeweller who lent his best pieces to Hollywood starlets for Academy Award appearances.

Benoit Tessier/REUTERS

Harry Winston Diamond Corp. may soon come under pressure to consider a spinoff of its retail business after a U.S. hedge fund with a penchant for board shakeups took a stake in the company.

Starboard Value LP, a New York-based firm that is no stranger to proxy battles, had a 1.53-per-cent stake in Harry Winston as of Sept. 30. The company has not commented on whether it plans to agitate for change but its specialty is doing exactly that.

"Starboard invests in deeply undervalued small-cap companies and actively engages with management teams and boards of directors to identify and execute on opportunities to unlock value for the benefit of all shareholders," the company states on its website.

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Harry Winston declined comment on Friday about Starboard's investment and Starboard was not available to discuss its investment.

Toronto-based Harry Winston Diamond was created as it exists today in 2006, when Canada's Aber Diamond Corp. acquired Harry Winston Inc., the 70-year-old legacy of a U.S. jeweller who lent his best pieces to Hollywood starlets for Academy Award appearances.

Speculation about a spinoff of Harry Winston's retail division has swirled ever since it became a miner with the Aber merger. It gained new traction in recent weeks after a series of seemingly unrelated events.

On Oct. 18, the company said it had received various indications of interest regarding a potential purchase of its luxury brand segment. It also said it was not in active negotiations regarding any such transaction.

And then last week it announced it was acquiring a controlling stake in Ekati, Canada's first ever diamond mine, from global miner BHP Billiton Ltd. as it targets growth in the upstream diamond sector.

Such an expansion would make sense in light of a general view that diamond supply will be constrained as demand builds in China and India and global output fails to rise.

"It's always been something people have discussed, will they split up the group," said Edward Sterck, an analyst with BMO Nesbitt Burns Inc. in London. "And effectively Starboard taking a stake was an excuse for people to talk about it, basically."

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Arguments have been made for and against a breakup of Harry Winston's mining and retail divisions.

Arguments for keeping them together include the fact that owning diamond supply is a hedge against future high prices. On the other hand, synergies are difficult to capture because mines produce such a spectrum of diamond qualities that most are not suitable for jewellery.

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