Executives of Westport, Conn.-based Compass Diversified (NYSE: CODI) think its nearly $300 million investment in Lugano Diamonds & Jewelry Inc. can help elevate the Newport Beach firm to become “the next major jewelry brand.”
To do so, expect to see an expansion in Lugano’s presence via new markets, new store locations and more event sponsorships and philanthropic work that helps the company build ties to the communities the jewelry maker and retailer operates in, said Moti Ferder, co-founder and CEO of Lugano.
Don’t expect a change in Lugano’s strategy of focusing on the high-end of its market, making what Compass calls “one-of-a-kind jewelry for some of the world’s most discerning clientele,” Ferder noted.
For other big jewelry brands, “they went after the rich and famous [clients] first, and then went middle market” as they got bigger, Ferder told the Business Journal last week.
“We want to stay in, and capture that upper-end market,” Ferder said. “We want to redefine that space, as a very high-end jeweler.”
Its jewelry often sells for $50,000 or more.
Lugano was founded in 2004. It posted some $30 million of adjusted earnings before interest, taxes, depreciation, and amortization for the 12 months ended June 30, on sales of about $96 million. Last week, the company announced a deal to sell a 60% stake to Compass Diversified, in a transaction whose enterprise value was cited as $256 million.
A final sales price hasn’t been disclosed, and is still subject to a few factors, according to a reading of the purchase agreement.
Compass Diversified, which is valued at about $2 billion and has its West Coast base in Irvine, is paying $198 million in cash as part of the transaction, and is also providing a $102 million credit facility to Lugano, regulatory filings indicate.
Existing owners of Lugano, led by Ferder, are rolling over some $67.5 million of their interests into the Compass-owned business and are retaining the remaining 40% stake in the jeweler, those filings indicate.
The company’s current management is remaining in place.
5.11 Parent
Compass Diversified counts 10 majority-owned middle-market businesses in its portfolio, each of which it describes as “a leader in its niche market.”
The brands in the portfolio run the gamut, from baby stroller maker Ergobaby to Advanced Circuits, a maker of printed circuit boards.
Its largest holding by sales is another Orange County firm, Irvine-based 5.11 Inc., a retailer and maker of tactical clothes and gear that it bought in 2016 for $408.2 million.
The Business Journal last month reported on a potential spinoff and initial public offering for 5.11, which ended 2020 with net sales of $401.1 million. Compass as a whole saw 2020 net income of $27.1 million on revenue of $1.6 billion.
Lugano’s “been growing extremely fast for quite a while,” Ferder said.
He added that the backing of Compass Diversified can help it build its national and international presence and do so profitably.
“We’ve been looking for a partner with secure financial backing, so we can take advantage of the opportunities in front of us,” he said. “The [sales] process went extremely smoothly.”
The Irvine office of Gibson, Dunn & Crutcher LLP acted as legal counsel to Compass Diversified in the transaction. Holland & Knight LLP, with local offices in Irvine, acted as legal adviser to Lugano.
New Locations
“Lugano’s deep commitment to product design and authentic connection with its target clientele differentiates it from its competitors,” said Elias Sabo, Compass Diversified CEO, when announcing the deal last week.
“We believe that Lugano, as a trusted jewelry adviser offering a rare combination of exclusivity and service, has a sustainable business model capable of generating significant revenues and growth in both the near and long term,” said Sabo, who added his company intends to help Lugano expand via an expansion in its merchandising strategy, “including continuing its retail rollout and expanding its event-driven marketing efforts.”
Lugano currently has retail locations in Newport Center, Aspen, and two spots in Florida, Palm Beach and Ocala. The latter location is at the World Equestrian Center, the largest equestrian complex in the country. Lugano typically hosts and sponsors more than 70 equestrian, social and charity events throughout the year.
When entering a new market, “we want to get involved in the community, and be an advocate for philanthropic causes,” Ferder said.
He said Houston and Washington, D.C. are likely next for the company’s new locations.
An expansion in Europe is still in the cards, but has been delayed due to the pandemic, Ferder said.
“We’re hiring a lot of people, in Orange County and elsewhere,” he said.
