Blue Nile (NILE) said Monday it agreed to be acquired by private equity investors in a transaction with a 34% premium, prompting shares to kick up 31% in the session's early trading.
It's a transaction that leaves the PE buyers—in this case Bain Capital Private Equity and Bow Street—to add a unique and at the same time perplexing asset to their portfolios. It's got some of the qualities that financial sponsors like in their acquisitions—on the face of it, a disruptive technology in a lucrative, established and persistent market—along with a host of challenges that the firms are going to have to grapple with.
On one hand, they're buying an online alternative to brick and mortar retailers of engagement rings. Blue Nile was supposed to remedy some of the business' long-standing reputational shortcomings by introducing pricing transparency, cutting out the massive inventory levels of its rivals, and leaving customers with a more vibrant shopping experience than they could get at the Zales in the mall.
The comparison between brick and mortar engagement ring retailers and the Blue Nile online experience doesn't stop at the inventory line on the balance sheets, although the contrast in that metric is startling: Blue Nile reported an inventory holding of $46 million last year. Tiffany (TIF) had $2.2 billion. Think of the margin that a brick and mortar retailers has to take off each sale just to capture any kind of return on what it's already bought and is holding in its vaults.