RBC Downgrade Sparks Harry Winston Takeover Speculation

Saying that its model for Harry Winston was too optimistic, RBC Capital Markets has sharply revised its financial forecasts and price target for the diamond firm. RBC downgraded its Harry Winston rating from Outperform, Above Average Risk to Sector Perform, Speculative Risk and lowered the share price target to $5 from $13.

RBC said it downgraded its rating to “reflect the near-term risks relating to Harry Winston’s financing situation, and overall volatility and low visibility in the diamond industry.”

The firm said it now believes that rough diamond prices may fall up to 40 percent, bringing prices for Diavik goods down to $50 - $60 per carat over the next few quarters. Diavik sales ranged $90 - $115 per carat in 2008, RBC added.

The RBC forecast caught the attention of many in the financial markets, leading insiders to conclude that Harry Winston is very attractive take-over target, with at least one saying that this may well happen.

RBC warns that Harry Winston is “likely” to become “cash negative” over the next two to two and half years “unless it can refinance its expected $75 million of debt due in 2009 and secure incremental financing.”

In addition to diamond mining, firm also has its name sake retail operation, high-end retailer Harry Winston, which has 19 stores located in high-end retailing centers around the world.

RBC forecast $114 million in sales, general and administrative costs for the retail operation in 2010. It therefore expects Harry Winston to revisit assumptions around productivity of individual salons, and perhaps close marginal locations.