De Beers Opens Door to U.S. Market With Price-Fixing Settlement
July 16 (Bloomberg) -- De Beers, the world's biggest diamond company, may return to the U.S. for the first time in more than half a century after pleading guilty to price-fixing charges in an Ohio court and agreeing to pay a $10 million fine.
De Beers, which Ernest Oppenheimer turned into a global cartel in the 1930s, plans to open a store on New York's Fifth Avenue as the company loosens its grip on sales of uncut gems and taps the $57 billion-a-year retail market. The U.S. accounts for 55 percent of retail diamond sales and has been closed to De Beers since the first antitrust complaint was filed after World War II.
``This has been a sword hanging over their head,'' said Alan Miller, chief executive of Johannesburg-based Stanlib Asset Management, which manages $25 billion, including shares of Anglo American Plc. Anglo owns 45 percent of De Beers. ``I am feeling good about this.''
The guilty plea Tuesday in U.S. District Court in Columbus, Ohio, came four years after Johannesburg-based De Beers, which sells three-fifths of the world's uncut diamonds, stopped hoarding gems to drive up prices, committed itself to being more transparent and backed a campaign to ensure that sales of diamonds no longer finance civil wars across Africa.
``De Beers is bringing a chapter of its history to a close,'' the company said in a statement. ``The decision to resolve this matter is consistent with our continuing commitment to creating a new, modern De Beers that is fully prepared to assume its role as a responsible corporate global citizen.''
Anglo American
Anglo American, the world's second-biggest mining company, received $386 million in profit before one-time items and goodwill amortization from its stake in De Beers last year. The figure was 23 percent of Anglo's total earnings and its biggest source of profit.
The Oppenheimers, Africa's richest family, and the Botswanan government own the rest of De Beers. Nicky Oppenheimer, Ernest's 59-year-old grandson, is the company's chairman.
Gaining access to the U.S. market will increase earnings and bolster Anglo's share price, Miller said. Anglo shares rose 11 percent to 1,130 pence during the past 12 months in London, outpacing a 6.6 percent gain in the FTSE 100 Index.
De Beers in 2001 formed a $400 million retail jewelry venture with LVMH Moet Hennessy Louis Vuitton, the world's biggest luxury goods company. The venture has one store in London and three in Tokyo.
The store on Old Bond Street in London offers jewelry ranging from earrings that sell for 600 pounds ($1,114) to a necklace of 52, two-carat diamonds at 1.4 million pounds. Customers can inspect the gems through microscopes, which reveal an invisible De Beers trademark, and devices that flash beams of light through each stone to detect imperfections.
Manhattan Store
Plans to open the New York store are ``absolutely in place,'' and the opening date depends on construction schedules, Guy Leymarie, the venture's chief executive, said from his office in London. De Beers is considering its options for business in the U.S., said Andrew Bone, a London-based company spokesman.
``De Beers has made the strategic decision that it must be able to operate in the United States of America, apparently at any price,'' said Chaim Evan-Zohar, the principal shareholder of Ramat Gan, Israel-based industry consultant Tacy Ltd.
On Tuesday, De Beers was fined $10 million after pleading guilty to charges that it fixed prices for industrial diamonds in 1991 and 1992. The Justice Department in turn agreed not to pursue additional criminal charges.
``This guilty plea reflects the department's persistence in the fight against illegal price fixing,'' R. Hewitt Pate, assistant attorney general in charge of the Justice Department's Antitrust Division, said in a statement.
Gina Talamona, a Washington-based spokeswoman for the department, declined to comment on whether any remaining issues would prevent De Beers from doing business in the U.S.
``Our matter with them is resolved,'' she said. ``That's pretty much all I can say.''
Travel Concerns
De Beers had previously refused to appear in an American court, and its directors wouldn't travel to the U.S. for fear of prosecution.
``We chose not to do business there,'' Bone said. ``We didn't want to open ourselves to an element of risk.''
Founded by British colonist Cecil John Rhodes 116 years ago, De Beers sells uncut gems to 87 exclusive clients through a series of 10 auctions each year. U.S. customers buy diamonds at the sales, which take place in other countries. Other U.S. business, such as advertising, is handled through intermediaries.
``The U.S. Department of Justice Department has achieved what it wants, to get a scalp, and it allows De Beers to get back into that massive market,'' said Anwaar Wagner, an analyst at Metropolitan Asset Managers in Cape Town, South Africa, which oversees the equivalent of $5.3 billion. ``It opens the door.''
Civil Suits
Still, by admitting guilt De Beers may have opened the way for civil lawsuits. W.B. David & Co., a former De Beers client, this month filed a lawsuit in New York demanding $100 million in damages caused by De Beers's alleged monopolistic practices. De Beers said the suit was without merit.
``The problem is a whole host of other guys are going to sue them,'' said Daniel Sacks, who oversees mining stocks at Cape Town- based Investec Asset Management, which oversees $39 billion. ``Their business model is still monopolistic in nature.''
Ernest Oppenheimer, who founded Anglo American in 1917, gained control of De Beers 12 years later. As other producers increased output in the 1930s, he sought to control prices by setting up the Diamond Corp., which bought gems from competitors and sold them to diamond cutters. The company controlled about 80 percent of rough diamond sales as recently as the 1980s.
De Beers on Wednesday said it completed the sale of its diamond stockpile, which was worth $4.9 billion in 1999.
Competition Increases
Selling diamond engagement rings, necklaces and earrings directly to customers may be De Beers's best opportunity for growth as competitors once again increase production to take advantage of increasing demand for uncut gems.
De Beers first-half sales will likely rise 5.5 percent to $3.08 billion, according to the median estimate of four analysts surveyed by Bloomberg.
BHP Billiton, the world's biggest mining company, and No. 3 Rio Tinto Group have opened diamond mines in Canada to compete with De Beers's pits in Botswana and South Africa and the company's ships that sift gravel off the Namibian coast.
De Beers's dominance of the rough diamond market isn't in danger for now.
``It will take a long time for the legacy of being the world's dominant supplier of rough diamonds to erode,'' said John Meyer, an analyst at Numis Securities in London. ``In the meantime they will grow their margins.''
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