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Zale & Signet Sparkle: Is Tiffany Next?


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There is sparkle everywhere, as Signet Jewelers Ltd (SIG - Snapshot Report) entered into an agreement to buy Zale Corporation (ZLC - Snapshot Report) that would help both the companies to strengthen their position in the jewelry sector and tap new marketplaces. The investors gave thumbs up to the deal, as the shares of both Signet and Zale skyrocketed 18.1% and 40.3%, respectively, during the trading hours. 

The acquisition, which involves a payment of $21.00 per share (i.e. a 41% premium over Zale's Feb 18 closing price), would result in combined sales of $6.2 billion generating from approximately 3,600 retail outlets and annual synergies of roughly $100 million within three fiscal years, resulting from operational efficiencies.

This transaction valued at $1.4 billion will be financed via bank debt, other debt financing and the securitization of a considerable part of Signet's accounts receivable. Post-acquisition, Zale will continue to be spearheaded by its current CEO, Theo Killion, who will report to Mike Barnes, the CEO of Signet.

Golden Gate Capital, which assisted Zale with $150 million in 2010 when it was grappling with liquidity crisis and in turn gained approximately 22% stake in it, has also given its nod to the accord. The deal is anticipated to be accretive to earnings in the high single-digit percentage in the first full fiscal year after the transaction is concluded.

Let’s look at their holiday season numbers to have a fair idea of their performance. Signet registered a comparable-store sales growth of 5%, while Zale recorded a comps increase of 2% (in constant currency) or 0.7% in U.S. dollar basis.

From the perspective of stores, Signet operates more than 1,400 U.S. outlets under the brand names Kay Jewelers and Jared The Galleria of Jewelry, whereas its U.K. division operates about 500 outlets under the brand names H.Samuel and Ernest Jones. On the other hand, the purchase of Zale will bring itself with approximately 1,680 retail stores operating in the United States, Canada and Puerto Rico under the brand names Zales Jewelers, Zales Outlet, Gordon's Jewelers, Peoples Jewellers, Mappins Jewellers and Piercing Pagoda.

The jewelry market was hit hard when the U.S. economy came under the grip of the recession, leaving customers no option but to curtail their discretionary expenditures. Even now, when the economy is gaining traction, the sector does not look much promising as it was in pre-recessionary period.

As a result, the buyout of Zale by Signet seems timely. We believe it will not be surprising if the industry witnesses such consolidations in the near future. However, the market awaits the reaction of Tiffany & Co. (TIF - Analyst Report) on the acquisition, whose shares fell 0.2% yesterday.

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