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Signet to Acquire Zale Corp. for $21 Per Share

Analyst Downgrades Zale to $15

Feb 19, 2014 7:14 AM   By Jeff Miller
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RAPAPORT...  Signet Jewelers Limited announced that it will acquire long-time rival Zale Corporation for a cash consideration of $21 each per share, valuing the deal at approximately $1.4 billion. At this stage, Signet stated that management's intention was to operate Zale under the current CEO, Theo Killion, who would report to Signet's CEO once the acquisition is completed. The transaction is subject to Zale's shareholders and regulatory approval. 

Signet's offer represents a premium of 41 percent over Zale's closing price of $14.91 on  February 18. Signet has also entered into a voting and support agreement with
Golden Gate Capital, the beneficial owner of approximately 22 percent of Zale's common stock. The transaction is expected to be a high single-digit percentage accretive to earnings in the first full fiscal year after its  close, excluding acquisition accounting adjustments and one-time transaction costs. Shares in Zale surged 40 percent in premarket trading on the Nasdaq to $20.87 within minutes of the announcement. Signet's shares rose 11 percent to $90 in premarket trading.

"This transformational acquisition further diversifies our businesses and extends our international footprint, opening the door to greater growth and innovation across the enterprise," said Signet's CEO, Mike Barnes. "The addition of Zale to the Signet family is consistent with our long-term growth strategy and leverages our combined operating expertise to create better choices for our customers, new opportunities for our employees and makes us a more attractive partner to our vendors. In addition, it allows us to better optimize our balance sheet, creating long-term value for our shareholders. We are excited about the prospects for the combined company and
the many opportunities that this creates for our future."

Prior to this announcement, financial services firm Stephens Inc. downgraded Zale due to unfavorable mall traffic trends in February and concerns about weak spending on Valentine's Day. Stephens lowered Zale's price target to $15 from $16.50 per share.

Sterne Agee analyst Ike Boruchow wrote in a note to clients prior to this news that Signet's rating was lowered to ''neutral,'' with a price target of $79.28, as the consumer environment for jewelry is growing increasingly choppy. "We would favor the business that appears to have stronger demand trends at the moment, which would be Tiffany & Co.," Boruchow stated. Signet's gross margins have been trending negative for the past 12 months and its management recently guided the outlook lower. "We believe this pressure will continue into first quarter, as both Kay and Jared were more promotional leading up to Valentine's Day and our store checks suggest associates continue to utilize their flexibility to offer unadvertised percent-off discounts."

Signet contended that acquiring Zale strengthens its omni-channel presence, bringing together  Kay Jewelers, Jared The Galleria Of Jewelry, H.Samuel, Ernest Jones, Zales and Peoples across the U.S., U.K. and Canada.

Killion said, "Having successfully completed our multi-year turnaround program to return to profitability, Signet's operating strengths will enable us to accelerate Zale's performance improvement for the benefit of our current and future guests."
 
The acquisition will reportedly  be financed through bank debt, other debt financing and the securitization of a significant portion of Signet's accounts receivable portfolio.

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Tags: acquisition, financial news, Jeff Miller, mergers, Signet, Sterling Jewelers, Zale Corporation
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