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Golden Gate Capital potentially made itself close to $1 billion in less than a week.
This story first appeared in the February 20, 2014 issue of WWD. Subscribe Today.
On Wednesday, the private equity fund earned up to $150 million when Signet Jewelers Ltd. agreed to buy Zale Corp. for $1.4 billion in cash. Signet is paying Zale shareholders $21 a share, a 40.8 percent premium to Zale’s closing share price of $14.91 on Tuesday. Golden Gate owns 22 percent of Zale, making its stake worth about $150 million.
The windfall follows Golden Gate earning $825 million in cash and stock when Jos. A. Bank agreed to buy Eddie Bauer for that amount late last week.
Signet’s deal to buy Zale is further evidence that 2014 could see a wave of retail consolidation. Bulking up for scale was one reason Signet gave for buying its rival jeweler — the same reason Jos. A. Bank gave for bidding for The Men’s Wearhouse and the latter retailer subsequently gave for counterbidding for Bank.
The Signet-Zale deal is expected to create a group with sales of about $6.2 billion and more than 3,600 stores in the U.S., Canada and the U.K. The deal should close by the end of the calendar year.
Signet chief executive officer Mike Barnes will head the company but noted that “it is our intention that Zale will continue to run under current leader, ceo Theo Killion, who would report directly to me after the transaction closes.”
Barnes is looking for accelerated penetration of the bridal market, a Zale strength; more rapid development of global opportunities, and increased omnichannel activity. “The combined e-commerce sales of both companies are approaching $300 million today, with imminent growth still ahead,” he said on a Wednesday morning conference call. “We have opportunities to improve operational efficiencies and add best-in-class additional functionality to help drive this business.”
The transaction is expected to result in about $100 million in annualized cost savings within three years and, excluding acquisition costs and adjustments, be accretive to Signet’s earnings per share at a high-single-digit percentage rate in the first full year after the deal closes. It is being financed through bank debt and other debt financing, including the securitization of “a significant portion” of Signet’s accounts receivable portfolio, Signet said.
Arnold Aronson, managing director of retail strategies at Kurt Salmon, believes that Signet and Zale should make a good business combination, just as Jos. A. Bank and Men’s Wearhouse would have.
“Whether the pressure is from within or from Wall Street, if the internal operations, the strategic objectives and missions statements of the companies are compatible, one and one can add up to three instead of 1 7/8,” he said. “There is a major need today for expansion without cannibalization, and that requires an acquisition rather than the time or money it would take to do something like this on your own.”
He noted that Target Corp.’s entry into Canada was simplified by Hudson’s Bay Co.’s decision to discontinue its Zellers operation, allowing Target to pick up the rights to up to 220 Zellers leases. Target’s Canadian fleet currently numbers 124 and is expected to grow to 133 this year, although the retailer has admitted to major stumbles in its entry into Canada.
“In most cases, mergers of ‘likes’ work,” Aronson said, “and Signet and Zale would seem to fit that pattern. This makes sense. They’re both mass-oriented, moderately priced and they know how to run lots of stores. There are obviously a lot of efficiencies and savings to be had in areas like supply chain and e-commerce.”
Mark Cohen, the former ceo of Sears Canada who’s now a professor at Columbia Business School at Columbia University in New York, noted that too much similarity may work in favor of a successful business combination but can run afoul of government antitrust policy.
He pointed to the nullification of the proposed 1996 merger of Staples and Office Depot based on Federal Trade Commission concerns about an inflationary effect on pricing, a discussion being heard again following Comcast’s agreement earlier this month to buy Time Warner Cable for $45.2 billion.
However FTC scrutiny of the Signet-Zale deal plays out, Cohen sees the combination as logical in a number of ways.
“They’ve been beating the hell out of each other on price, so you wonder how much value a company adds, not by taking a principal competitor out of the picture, but instead inside the tent,” he told WWD. “This was probably part of the analysis by Signet. There’s no question that, in many mature markets, business is tough and profits are hard to come by, so there’s a tremendous focus on M&A because companies have been searching for growth and are having a hard time finding it or they’ve gotten into some trouble. Or maybe they’ve got an activist investor pushing them to do something or they’re looking to avoid one pushing them in that direction.”
Signet on Jan. 24 issued a statement saying it had held a “constructive” meeting with Corvex Management and reiterating its commitment to effective use of its capital to “maximize long-term value for shareholders, [through] acquisition activity” or other actions. On the same day, Corvex filed paperwork with the Securities and Exchange Commission reporting that it held 6.3 million shares of Signet, or a 7.8 percent stake. The stock was acquired, Corvex said, because it believed Signet’s shares were “undervalued and an attractive investment” and stating that officials with the firm “have had and may continue to have discussions” with Signet’s management about its business and strategies.
Cohen contrasted the proposed Signet-Zale amalgamation with the acquisition last year of Maidenform Brands Inc. by Hanesbrands Inc. for $583 million.
“The track record of success on acquisitions is less than 50-50, but I think Hanesbrands and Maidenform will be a success,” Cohen predicted. “But that’s a much different situation. Maidenform is a contracting business with a portfolio of brands that get added to Hanesbrands’ portfolio. And because Hanesbrands is so much larger, the risks of leverage on the deal are far less.”
Wall Street seemed more than comfortable with the proposed transaction, sending shares of Zale up 40.3 percent to $20.92, just 8 cents below the offer price. Less predictably, Signet’s shares soared 18.1 percent to $93.65. The two firms logged the largest increases of all U.S.-based fashion, retail and beauty firms tracked by WWD. Shares of Tiffany & Co. fell 0.2 percent to $88.39, although the luxury retailer, with a far more affluent typical consumer and a more global reach, isn’t seen as being affected by the merger of the more moderately priced jewelers.
Both firms, and particularly Zale, have been in something of a turnaround mode. Signet’s net income for the first nine months of the just-concluded year rose 2.5 percent to $192.8 million and fourth-quarter profits are expected to grow to $2.17 a diluted share from $2.12 in the fourth quarter of 2012, according to analysts’ consensus estimates.
For Zale, the 12 months ended July 31 marked its first profitable year after four years of losses dating back to 2009, when it bled $189.5 million in red ink during the Great Recession. It posted net income of $10 million last year versus a net loss of $27.3 million during the prior year and more recently reduced its first-quarter loss to $27.3 million from the $28.3 million lost in the comparable period of 2012. More recently, its holiday comparable-store sales rose 2 percent at constant exchange.
During 2013, Zale’s shares quadrupled in value, rising 305.4 percent to $16.66, while Signet’s rose 47.5 percent to $78.12.
“Having successfully completed our multiyear turnaround program to return to return to profitability, Signet’s operating strengths will enable us to accelerate Zale’s performance improvement for the benefit of our current and future guests,” Killion said.
The deal brings together the two largest middle-market jewelers in the U.S. market, with Signet holding the same distinction in the U.K. Zale operates 1,679 stores including 624 kiosk operations.
Signet’s $3.98 billion in sales during the fiscal year ended last January include about $2 billion attributable to Kay Jewelers, the largest retail jewelry brand in the U.S.; about $1 billion from Jared The Galleria of Jewelry; $400 million from H.Samuel, the U.K.’s top jewelry store, and $300 million from Ernest Jones, number two in the U.K. market. Its total store count is nearing 2,000.
Barnes noted that, once united, the two businesses will benefit from exclusive brands carried by the other. For instance, Zale’s Vera Wang Love and Celebration Diamond collections, important components of the retailer’s bridal assortment, “will add to and strengthen the overall exclusive brand portfolio within this very important category of business,” Barnes said of the bridal market.
Exclusive brands account for 27.4 percent of Signet’s sales, up from 19 percent in 2010, and 11 percent of Zale’s, up from 8 percent in 2012.
J.P. Morgan Securities LLC advised Signet on the deal, and J.P. Morgan Chase Bank NA committed to bridge financing. Bank of America Merrill Lynch advised Zale.