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Signet-Zale Deal Facing Shareholder Opposition

TIG Advisors says Zale has been undervalued and negotiations failed to adequately represent Zale holder interests.

Zale Corp.’s pending merger with Signet Jewelers Ltd. has hit a large stumbling block.

TIG Advisors LLC, an investment fund that holds 9.5 percent of Zale’s common stock, has come out in opposition to the merger, calling it “grossly unfair to Zale stockholders.” TIG claims the acquisition undervalues Zale and fails to recognize the retailer’s worth based on projections provided since the February merger agreement.

TIG also alleges that Golden Gate Capital’s earlier listing of its Zale shares, on Oct. 2, gave it a “strong incentive to favor a sale of the company now, at the expense of maximizing shareholder value with a longer-term perspective.”

Signet on Feb. 19 agreed to acquire Zale for $21 a share, or $1.4 billion, in cash. Golden Gate owns 22 percent of Zale.

Shares of Zale closed at $14.91 on Feb. 18, the day before the merger announcement, but have since moved beyond the merger price. They were up 71 cents, or 3.4 percent, to close Friday at $21.89.

TIG began building its 4.1 million share stake in Zale in March.

In an investor presentation subtitled “The Right Deal but the Wrong Price” and filed with the Securities and Exchange Commission Friday, TIG said it intended to vote against the merger at a special meeting at Zale’s Irving, Tex., offices on May 29 and urged other shareholders to do the same or abstain from voting. Consummation requires the affirmative vote of a majority of shares; without it, the parties would have until the deal’s expiration date, Feb. 19, 2015, to alter its terms.

TIG portfolio manager Drew Figdor said the benefits of the acquisition as agreed would flow too heavily to Signet shareholders and not enough to Zale’s, and that a price of at least $28.60 — $12.50 in cash and 0.158 shares of Signet for each share of Zale — would have been more equitable based on Zale’s projections since the merger agreement.

It said the acquisition premium provided to Zale shareholders — about $286 million — was just one-fifth of the $1.4 billion in value creation provided to Signet shareholders through deal synergies and expansion of profits expected from the Zale acquisition.

Additionally, TIG was critical of the process by which the merger came about. Zale chief executive officer Theo Killion was informed by Mike Barnes, his counterpart at Signet, that he would be retained as head of the Zale division upon completion of a deal on two separate occasions before an agreement was struck, TIG said. Also, the presence of a Golden Gate representative on the Zale board’s negotiating committee “created an inherent conflict,” setting Golden Gate up as both “judge and jury.”

TIG also castigated Bank of America Merrill Lynch, which served as the potential lead underwriter for Golden Gate’s Zale shares at the same time it was analyzing a potential offer for Zale on Signet’s behalf.

Signet and Zale didn’t respond to requests for comment. Shares of Signet fell 98 cents, or 1 percent, to close at $100.94 in New York Stock Exchange trading Friday.