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Leibish & Co

Monday, November 7, 2016

Investor Group To Acquire Blue Nile And Take It Private as Q3 Sales Drop 4.3%

In a Monday morning shocker, online jeweler Blue Nile said Monday that it has entered into an agreement to be acquired by an investor group led by Bain Capital Private Equity and Bow Street LLC. The all-cash deal is valued at $500 million. 

the investor group will acquire 100 percent of the outstanding shares of Blue Nile common stock. Blue Nile stockholders will receive $40.75 in cash per share, representing a premium of approximately 34 percent over Blue Nile's closing price on November 4.

An interesting tidbit from a personal perspective is that I was able to view the Blue Nile Fulfillment Center operation and recently wrote about it for Was I used to help finalize the deal?

The acquisition deal, which requires customary closing conditions, including the approval of Blue Nile's stockholders and regulatory approvals, is expected to close in the first calendar quarter of 2017, the companies said in a joint statement.

“Since its inception, Blue Nile's guiding principle has been to provide value to its customers, suppliers and shareholders and this transaction provides tremendous value to all,” Harvey Kanter, Blue Nile chairman, CEO and president, said in the statement. “Blue Nile will continue its innovative drive that has disrupted the diamond industry and made us the smartest, easiest, and most pressure-free way for consumers to buy a diamond.”

Ryan Cotton, managing director at Bain Capital Private Equity added, “This is an opportunity to acquire a true disruptor in a fundamentally attractive and growing segment of the diamond industry…. We believe the company will continue to grow as educated consumers continue to seek easy and convenient shopping experiences that deliver transparent pricing and enhanced value.”

Howard Shainker, managing partner at Bow Street said, “Blue Nile is a unique business with a strong platform in an industry that is rapidly evolving and migrating online. We are excited to work alongside Blue Nile management and Bain Capital to execute on the company's strategy.”

Blue Nile's board of directors unanimously approved the deal and recommended that stockholders vote their shares in favor of the transaction. Blue Nile will become a privately-held company and continue to be headquartered in Seattle. 

Blue Nile also may solicit alternative acquisition proposals from third parties during a 30-day “go-shop” period, following the date of execution of the merger agreement.

The announcement came at the same time Blue Nile released its third quarter earnings report, which showed a year-over-year net sales decline of 4.3 percent to $105.1 million for the period ended October 2. The report was issued without comment and a conference call scheduled for Monday was abruptly canceled. 

Operating income for the quarter totaled $1.8 million, representing an operating margin of 1.7 percent of net sales, compared to $3 million in operating income and 2.8 percent operating margin for the third quarter 2015. Net income totaled $1.3 million, or $0.11 per diluted share versus $2 million, or $0.17 per diluted share for the third quarter 2015.

Non-GAAP adjusted EBITDA for the quarter totaled $4.2 million compared to $5.3 million for the third quarter 2015. 

Other third quarter highlights include the following:

* U.S. engagement net sales decreased 8.5 percent to $59.5 million. 

* U.S. non-engagement net sales increased 1.2 percent to $25.3 million. 

* International net sales increased 1.8 percent to $20.3 million. Excluding the impact from changes in foreign exchange rates, international net sales increased 4.2 percent. 

* Gross profit totaled $20.6 million. As a percent of net sales, gross profit was 19.6 percent compared to 19.3 percent for the third quarter 2015. 

* Selling, general and administrative expenses were $18.8 million, compared to $18.2 million in the third quarter 2015. This included stock-based compensation expense of $1 million for the third quarter 2016 and $1.3 million for the third quarter  2015. 

* At the end of the third quarter, cash and cash equivalents totaled $40.6 million.

As far as the acquisition, BofA Merrill Lynch is serving as exclusive financial advisor to Blue Nile, and Wilson Sonsini Goodrich & Rosati is serving as its legal advisor. Goldman Sachs & Co is providing debt for the transaction, and Kirkland & Ellis LLP is serving as legal advisor to the Investor Group. 

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