Watches of Switzerland (1K) | Hold | Business ticks nicely but stock is gaining time

Research evidence excerpt

Watches of Switzerland (1K) | Hold | Business ticks nicely but stock is gaining time

Watches of Switzerland Hold | Target Price: 750.00p

Takeover talk

Going private

Watches of Switzerland has held talks in recent months over taking the company private,

Reuters reported, with private equity funds and strategic bidders interested in the company.

CEO Brian Duffy responded to initial approaches as he believes the company is undervalued and

reportedly said any deal had to be substantially above 750p/share. No formal offer has been

made and WOS declined to comment on rumours.

Rolex importance

While Watches of Switzerland has diversified with the acquisition of the US distribution rights

for jeweller Roberto Coin, we estimate that Rolex, through primary product and its certified

preowned scheme (CPO), still accounts for over half of group sales. Indeed, we believe the

Roberto Coin deal was at least partly driven by the surprise decision of Rolex to buy Swiss watch

retailer Bucherer, which vies with Watches of Switzerland as the world's biggest Rolex

distributor.

Chart 1:WOS sales by brand, product Chart 2:Rolex authorised dealers

Source: Kepler Cheuvreux Source: Kepler Cheuvreux

Wholesale distribution

In contrast to most luxury watch makers, Rolex has a wholesale distribution model. The

company relies on a network of <1,400 independent dealers to distribute primary product, of

which c. 175 also operate CPO. Despite fears that Rolex would favour Bucherer, it has continued

to allot product normally to other distributors. However, it has been concentrating its network

so that those distributors that remain are gaining Rolex (and overall) market share.

Rolex veto

We believe Rolex would rather avoid the disruption caused by a takeover at one of its biggest