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RAPAPORT... Zale Corporation's shareholders approved merging with Signet Jewelers Ltd. for $21 per share. Insiders say the shareholder meeting in Dallas this morning was sparsely attended. As news spread, shares in Signet rose almost 4 percent in New York to $108.38 per share at 11 a.m. Zale's shares were basically flat at $21.13. Neither company had issued a statement as of press time.
TIG Advisors, a major shareholder in Zale that opposed the buyout, told the Dallas Morning News that they were disappointed with the merger and had "made a good case to investors that Zale" would grow on its own. "The turnaround story was working," portfolio manager Drew Figdor told the newspaper .
Ike Boruchow, an analyst with Sterne Agee, said in a note to clients that the marriage between Zale and Signet "Rocked!"
"We believe the deal is favorable for both parties, as the combined business will have strong 16 percent to 17 percent share of the specialty jewelry retail market, with substantial synergies/accretion for the combined business. Given elimination of the biggest overhang on the stock and the material earnings power of the new company, $10.50-plus of earnings per share (EPS) by 2017, Signet remains our top pick," Boruchow wrote. Signet will pay Zale shareholders $21 per share, valuing the deal at $1.4 billion and including a roughly $500 million assumption of debt. Signet financed the buyout with $800 million in debt and $600 million from securitization of receivables.
Sterne Agee believes that Zale will greatly benefit from Signet's expertise in marketing, sourcing, branded merchandise and consumer credit, among other synergies. The firm reiterated its rating on Signet at "Buy" with a price target at $125 per share.
"We believe the potential accretion from the Zale model results in a substantial increase in earnings power over the next three to four years. Coupled with the combined company's dominant share of its market -- the closest competitor at just 1 percent --we believe the stock warrants a loftier multiple than the company previously attained," Boruchow wrote.
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