Signet Jewelers Agrees to Buy Zale in $1.4 Billion Deal

Signet Jewelers Ltd., operator of the Kay and Jared brands, agreed to buy Zale Corp. in a deal valued at about $1.4 billion, including debt, letting the company extend its lead as the largest jewelry chain in the U.S.

Signet is paying $21 in cash per Zale share, about 41 percent more than Zale’s closing price yesterday. Including Zale’s debt, which was about $500 million as of October, the transaction represents an enterprise value of 7.4 times Zale’s adjusted earnings before interest, taxes, depreciation and amortization, according to a statement today.

The purchase marks the biggest acquisition yet for Signet, which is gaining brands such as Zales and Peoples. It also adds more than 1,600 retail locations to Signet’s 1,900 stores, strengthening its lead over Tiffany & Co. For Zale, which has has seen its sales stagnate, the deal provides merchandising expertise that could help it return to growth, said Ken Gassman, president of the Jewelry Industry Research Institute.

“Zale needs a jewelry merchant to run it, and who better than Signet, which has been consistently successful over the years,” Gassman said. “This should assure the success of Zale.”

Investors applauded the deal, sending Signet’s stock up 18 percent to $93.65 at the close in New York. Zale jumped 40 percent to $20.92.

Holiday Sales

Signet is capitalizing on a resurgence in demand for jewelery, which was one of the strongest categories during the holiday season, according to MasterCard Advisors SpendingPulse. The acquisition also gives Signet better access to midrange jewelry customers, lets it enter Canada and enhances its e-commerce potential, Chief Executive Officer Michael Barnes said in an interview today. The merged company will have annual revenue of about $6 billion.

“It was a deal that made a lot of sense,” Barnes said. “It is very complementary. By combining the two companies, it could help us grow faster and further.”

The new company also will have greater buying power, which will reduce costs, company executives said on a conference call today. Zale, which will keep its CEO and remain a separate chain, can drive sales growth with the addition of exclusive jewelry brands, they said. The chain, a common sight in shopping malls, will continue to reduce its store count -- a process that was already under way.

Blue Nile

The U.S. jewelry industry is consolidating as stores face online challengers such as Blue Nile Inc., said Gassman, who is based in Glen Allen, Virginia. Still, fine jewelry and watch sales are outpacing the rest of the retail industry, rising 7.8 percent to $79.5 billion last year, he said.

Golden Gate Capital, which owns about 22 percent of Irving, Texas-based Zale, is supporting the deal, Signet said. Analysts anticipate sales will be little changed at Zale in the year ended July, according to data compiled by Bloomberg.

Signet, based in Hamilton, Bermuda, had previously discussed acquiring Zale. Those talks ended in June 2006 after Zale’s board decided to keep the company independent. Zale’s nonexecutive chairman, Terry Burman, also is the former CEO of Signet, Gassman noted.

Barnes said that Zale has been on his radar since he joined Signet three years ago and that the chain’s return to profitability under Zale CEO Theo Killion made the deal possible now.

Economic Slump

The U.S. jewelery industry had struggled during the latest recession as consumers cut back on discretionary spending. Finlay Enterprises Inc., Fortunoff Holdings LLC and Whitehall Jewelers Holdings Inc. closed down during the slump, in addition to hundreds of independent jewelers.

Signet said it will finance the acquisition through bank debt, other debt financing and the securitization of a portion of its accounts receivable portfolio.

JPMorgan Chase & Co. advised Signet on the deal, and Weil, Gotshal & Manges LLP provided legal counsel. Zale was advised by Bank of America Corp. and Cravath, Swaine & Moore LLP.

(Corrects industry sales figure in ninth paragraph of story published Feb. 19.)
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