KEY POINTS:
Michael Hill International hopes its $7 million acquisition of 17 jewellery stores in the United States will give it a good introduction into a tough market.
The company announced yesterday that it had entered into a conditional agreement to buy stores in Illinois and Missouri from Chicago-based retailer Whitehall Jewelers, which last week announced it was liquidating its 373 stores after being unable to find a buyer or drum up fresh equity since filing for Chapter 11 in late June.
Chapter 11 in the US Bankruptcy Code allows for a business to restructure, usually involving another corporation or partnership, to keep its business alive and pay creditors over time.
The purchase marks Michael Hill's first foray into the US market, following expansion into Australia, where it now has 136 stores, and more recently Canada, where it has 22 outlets.
Chairman Michael Hill believed the company had secured 17 prime locations, providing a sound launching pad into the US market.
The average Whitehall jewellery store is located in a mall and ranges from between 65 and 230sq m. Most of the 17 stores are clustered in and around Chicago, with two stores in St Louis, Missouri, which is at the southern tip of Illinois.
"This grouping of stores fits with our historical pattern of building a concentration of stores in new markets to leverage efficiencies in logistics, marketing and management supervision."
Hill viewed it as a strategic acquisition to test its retail model in the highly competitive US market - albeit at a time when the economy is challenging.
Whitehall Jewelers, which has been operating since 1895, had been a victim of the difficult US economy. It had battled several years of financial difficulties, and finally succumbed to an ever-constricting cash supply in the face of falling sales and the global credit crunch.
Hill does not expect the US stores to achieve profitability for several years, but believes the acquisition was one which would enable his company to enter the market on favourable terms.
"Our short- to medium-term focus will be on honing our retail formula for future growth from this base."
The purchase price of about US$5 million ($7 million) is payable in cash upon settlement, which is expected to occur on or before September 9.
Hill said the purchase would be funded from existing bank facilities and cash resources. The purchase price is attributed primarily to the inventory and will be set at an amount equal to 80c on the dollar on the cost price of the inventory held at the 17 locations on settlement date.
The deal includes Whitehall's rights with respect to store fitouts and leases for the 17 stores and all other trading assets at those locations.
US regulatory approval is also needed, with the court hearing set down for Thursday.
Shares in Michael Hill, which last week announced a 20 per cent rise in full-year profit, closed at 95c, up 4c.
