Published January 28, 2009

Sincere: a matter of who'll blink first

By JAMIE LEE

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HAD it been a good year with cash-flush markets, Sincere Watch wouldn't be sitting on the shelf now, waiting for its suitor. But with the drastic change in market dynamics, the sale of Singapore's biggest watch player has been delayed by lower-than-expected bids, sources say. There is little doubt that Sincere - which was sold to Peace Mark for $530 million at the end of 2007 - is a prize possession. Given its established presence in Singapore and the region, whichever company clinches the brand would be able to cement its position as a luxury watch player and look to boost margins by negotiating favourable pricing with watch suppliers.

One tipped bidder, The Hour Glass, is said to be looking at boosting its negotiation space this way, which is a shrewd and gutsy move. Its management had argued as early as 2005 that the watch retailers must have a firmer grip on pricing. But as Singapore and the rest of the world witness a severe economic slowdown, it is unlikely that the bidders, including The Hour Glass and the consortium - consisting of Sincere shareholders, China's top watch retailer Xinyu Hengdeli and Malaysian parties - would pay top dollar, and for good reason.

The euphoric sentiment that drives the high-end market has vanished. Anecdotally, people across all income brackets are too worried about job cuts among family and friends to mull over buying a new Prada bag or, in this case, a Franck Muller watch. This is putting pressure on earnings for the luxury players. And acquiring a company like Sincere Watch now means taking on the added burden of falling sales numbers. It would also take a heavy toll on management resources.

Moreover, the credit crunch has led banks to become more cautious over lending and companies are loath to take on debt. Even if businesses can obtain some debt for acquisitions and stomach the higher borrowing rates at this point, in the long term a poorer gearing level would not bode well when seeking refinancing later as heightened credit scrutiny from banks is set to continue over the next few years. All this means that while the bidders may want Sincere, they probably don't want it as badly as the liquidators would like to offload it.

The bidders don't want to spend too much on Sincere even though it's a pretty decent buy, because the economic situation and the credit crunch have possibly reduced it to a white elephant at this point. It could prove to be more risky to expand now, especially as this industry is capital-intensive; watch retailers hold expensive inventory that could put a heavy drag on logistics costs and other expenses if turnaround time is slow.

The only compensation for that risk is a lower price. This has implications for other M&A deals as it shows that the buyer-seller gap is still wide, which is why many deals are still stewing and cannot be closed, bankers say. Bankers have also pointed out that because of the credit situation, big deals are almost out of the picture. And while some smaller deals may see the light of day, that would only happen when the gap starts closing - which means someone must blink first.

In the case of Sincere, liquidators would probably relent and accept a lower bid because it doesn't benefit them to hold onto an asset that can still be sold off now. As the economic situation continues to sour, bidders may soon lose interest and abandon the deal - a huge risk for the liquidators, who want to recover money from a sale as soon as possible.

The reality is that in good times, liquidators could pull out historical earnings ratios, try to project future profits and arrive at a good selling price. But in uncertain times like these, such ratios are tossed out the window. Bidders know this and are not going to budge very much from their bid prices - said to range around $300 million, or about half of what Peace Mark paid for Sincere.

There are other issues at play, such as the bidders' strategies for holding on to Sincere's key brand distributorships and understanding how the dynamics between brand owners and watch retailers would change following the sale. The new owner must also be able to retain experienced staff members who attract regular customers and have firm contacts in the watch market to keep the business relationship going - a long-term strategy that is crucial in most industries.

But in the end, the crux lies in the price; sooner, rather than later, something or someone has got to give.