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RAPAPORT... TIG Advisors LLC told Zale Corporation investors to vote against the Signet Jewellers Ltd. buyout and it has filed a preliminary proxy statement to oppose the merger. TIG owns approximately 9.5 percent of Zale's shares. Zale's shareholders are scheduled to vote on the merger on May 29, during a special meeting in Dallas.
“We believe the current offer price of $21 per share is grossly unfair to current shareholders. Shareholders are not being paid a fair value for the margin expansion opportunity they already own, much less a premium. The transfer of value to Signet shareholders and the lopsided sharing of deal synergies could not be seen more clearly than by comparing the $1.4 billion of value accretion that Signet shareholders have enjoyed versus the $286 million premium paid for Zale shares. Said another way, Signet holders have benefited 5x the amount that Zale holders have,” said Drew Figdor, the portfolio manager at TIG. TIG's analysis of the Zale and Signet deal identified several problematic issues in how Signet valued Zale. The day before the announcement in February, Zale was trading at an EV/EBITDA multiple of 9.1 times 2016 analyst estimates. Using Zale's 2016 base-case estimate, this would imply a $31 share price and by the retailer's estimation for downside estimates, the figure would still be $25 share, according to TIG.
The group also argued that had Zale's projections been known to investors ahead of the Signet proposal, TIG believes that investors would have valued the shares well in excess of recent trading ranges. "We also believe Golden Gate’s announced intention to register shares for sale adversely affected Zale's market value," TIG stated.
Zale and its financial advisor, Merrill Lynch, Pierce, Fenner & Smith Inc. relied on stale financial forecasts prepared some time before July 31, 2013 in evaluating the fairness to Zale's stockholders, TIG explained. "By our estimate, the $1.4 billion increase in Signet’s market capitalization on the date of the merger announcement compares to a $286 million premium paid for depressed Zale shares," the investment firm stated. Additionally, TIG believes the inclusion of Golden Gate’s representative on Zale's negotiation committee, representing its 23 percent stake in the jeweler, created an inherent conflict of interest that only sought to sell its stake without maximizing shareholder value. Given that point, the board should have negotiated a transaction that required the vote of a “majority of the minority” of Zale shareholders for the approval of the merger. But Merrill Lynch was also, and simultaneously, soliciting business from Signet by analyzing the merits of a potential acquisition of Zale for $17 to $21 per share, TIG stated. "We believe that BofA Merrill Lynch was conflicted and not in the best position to provide a fairness opinion on the proposed merger given its prior involvement with Signet. We question why BofA Merrill Lynch and not any of the numerous other nationally recognized investment banks were retained," TIG claimed. Zale never explored interest in a sale prior to receiving Signet’s unsolicited offer and then proceeded not to solicit competitive bids and rather, entered into a merger agreement with Signet that did not contain a “go-shop” provision. TIG also stated that Signet told Theo Killion, the CEO of Zale, before the deal was announced that it preferred for him to continue leading Zale after the transaction, further deepening the level of conflicts replete throughout the process. In the event that shareholders do approve the buyout, TIG intends to pursue an appraisal claim against Signet to compel additional consideration for its interest.
TIG Advisors has retained Olshan Frome Wolosky LLP as its legal counsel and MacKenzie Partners Inc. as its proxy solicitor to support its efforts to oppose the pending merger.
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