American buyout giant’s gem plan could quickly lose sparkle

KKR’s plan to merge the diamond operations of Rio Tinto and BHP Billiton might sound ambitious, but the deal loses its sparkle upon closer inspection.

The market for the proverbial girl’s best friend is hot, about that there is no doubt. Demand is holding up even in mature markets while emerging countries are quickly falling in love with bling. Supply is tight, with prices expected to rise by seven per cent a year until 2015.

By adding together the assets of Rio and BHP, the American buyout giant will create the world’s Number Three diamond producer. But it will be a distant third, accounting for around just 10 per cent of production.

The top two players, Anglo American’s De Beers and Russia’s Alrosa, account for around a quarter of production each. The business being mooted by KKR would be remarkably sub-scale in comparison.

The assets being put on the block by BHP and Rio are hardly 20 carat either. Most of the low-hanging fruit has already been picked, while the cost of extracting the remainder is only going up. Rio in particular has been plagued by the cost of expanding its Argyle Mine in Australia, which exploded from a planned $500m to $2bn.

It is highly unlikely that KKR will be able to buy any new discoveries to scale up. There have been just four significant finds in the last thirty years, most recently back in 1997.

KKR could explore further consolidation opportunities with other smaller players, such as Gem, Petra, Lucara and Harry Winston, but there is no guarantee of success.

One thing is clear. Beyond Anglo and Alrosa, the diamond market is far too fragmented. Expect more consolidation ahead.

EXPRESS CHANGE AT TESCO
I do hope that Tesco’s boss Philip Clarke will do something to address the problems with Tesco Express, the supermarket’s chain of convenience stores. As a regular shopper in these, I often find the experience to be substandard.

The stores predominantly sell branded products rather than cheaper own-brand goods, making them far too expensive. They also seem to always stock larger sizes – the 500g Lurpak butter rather than the 250g one, for instance. That might be better for margins but it is ridiculous for something styling itself as a convenience store. And some of the staff, who were kept on after Tesco’s acquisition of T&S in 2002, don’t seem up to the standard you find in the bigger stores.

Like many readers, my main interaction with Tesco is via these small stores. They do little to encourage me to choose the retailer for my main weekly shop.

david.crow@cityam.com
Follow me on Twitter: @davidcrow83