UPDATE 3-Kay Jewelers parent Signet to buy rival Zale for $690 million

Wed Feb 19, 2014 6:03pm GMT

Quotes

   

* $21-per-share price is 41 percent premium to Tuesday's close
    * Signet shares rise more than 16 percent
    * Deal would mean big payday for Zale shareholder Golden Gate Capital


    By Phil Wahba
    Feb 19 (Reuters) - Signet Jewelers Ltd is buying smaller rival Zale
Corp for about $690 million, an acquisition it said would strengthen its
place in the U.S. jewelry sector and let it tap new markets.
    The deal, announced on Wednesday, would combine the two largest U.S.
mid-tier jewelry store chains, Zales and Signet's Kay Jewelers. The price of $21
per share is a 41 percent premium over Zale's close on the New York Stock
Exchange on Tuesday.
    The deal caps a multiyear turnaround for Zale, which last July reported its
first profitable fiscal year since the 2008 financial crisis and in January
posted strong holiday sales.
    The company's stock, which traded as low as $3.76 only 10 months ago, rose
to $20.89 on Wednesday. 
    The merger would also mean a big payday for Golden Gate Capital, which holds
about 22 percent of Zale shares.
    The private equity firm gave Zale a $150 million lifeline in 2010, when it
was running low on cash, and in return received warrants to buy 25 percent of
the retailer's shares at $2 apiece.
    In the United States, Signet and Zale would have a combined 16 percent share
of the specialty jewelry market, which is highly fragmented, according to
IBISWorld data.    
    The merger would also make Signet the biggest jeweler in Canada, where Zale
operates the successful Peoples Jewellers chain. Signet would also gain a much
bigger presence in the growing U.S. jewelry outlet business, where Zales Outlets
is a leader.
    Other benefits include more leverage with diamond vendors at a time both
companies are focusing on their bridal businesses, and annual savings of about
$100 million from combining operations, Signet said.
    Investors agreed, sending Signet shares up 16.2 percent to $92.12. 
    
   
   
    Signet Chief Executive Officer Michael Barnes told Reuters that the company
had approached Zale about a deal in the autumn. It was not the first time the
rivals discussed a combination; in 2006, Zale ended tentative, short-lived
merger talks with its bigger rival.
    In 2010, Signet hinted that it would look at a deal to get a new nationwide
U.S. jewelry chain, saying it would take too much time and money to build one.
    The deal is subject to Zale shareholders' approval.
    
     REVERSAL OF FORTUNES
    In 2009, debt-laden Zale went through a severe liquidity crisis that forced
it to cancel orders right before the key holiday season, alienating vendors and
customers to Signet's benefit.
    In the next two years, Zale made strides by closing unprofitable stores and
adding exclusive brands like Vera Wang bridal jewelry, some of it costing as
much as $17,000, at its now 90-year-old namesake chain.
    Barnes told Reuters that Signet would not combine Zales and Kay stores at
malls that have both as long as each is profitable.
    Signet operates 1,400 U.S. stores, including its higher end Jared chain.
Zale has about 800 Zales and Gordon's Jewelers stores, as well as 630 Piercing
Pagoda mall kiosks.
    Buying Zale will also reduce Signet's reliance on its British chains, H.
Samuel and Ernest Jones, which are market leaders but whose growth has been
uneven in recent years.
    Zale will become a division of Signet. Zale CEO Theo Killion will manage
that division after the deal, but will report to Signet CEO Barnes.
    Including debt, the all-cash deal values Zale at about $1.4 billion, the
companies said. 
    Signet said it expected the deal to increase earnings by a high single-digit
percentage rate, excluding acquisition costs, in the first year after closing.
    The jeweler said it expected to finance the transaction through bank debt,
other debt financing and converting a significant portion of its accounts
receivables into cash.
    Signet said J.P. Morgan Chase Bank had committed to provide bridge
financing for the transaction. J.P. Morgan Securities acted as financial adviser
to Signet, while Weil, Gotshal & Manges was legal counsel.
    Bank of America Merrill Lynch was financial adviser to Zale, and
Cravath, Swaine & Moore acted as legal counsel.