Institutional Shareholder Services Thursday sided with the buyer and seller, and against the dissident shareholder, in the battle over Signet Jewelers Ltd.’s deal to purchase Zale Corp. for $1.4 billion, or $21 a share.

The ISS determination comes one week before a special meeting of Zale shareholders to approve or reject the acquisition. TIG Advisors LLC, which owns 9.5 percent of Zale’s stock, has indicated it intends to vote against the deal, claiming it undervalues Zale and its potential for stronger operating results in the wake of its turnaround. Although it supported the combination of the two companies, TIG claimed that a price of about $28.60 a share would have been more appropriate based on projections provided by the two firms since they agreed to a deal in February.

The two jewelry retailers, however, have stated that the projections cited by TIG represent “stretch” scenarios meant as targets for management.

The ISS analysis of the transaction lists Golden Gate Capital Corp. as Zale’s biggest shareholder, with a 23.3 percent stake, followed by SEB, at 14 percent, and TIG.


In its conclusion that a vote in favor of the transaction is “warranted,” ISS noted that, in Zale’s third-quarter results, reported on Tuesday, the company exceeded analysts’ consensus expectations for earnings before interest, taxes, depreciation and amortization and earnings per share “but missed on revenue, the key metric on which the business plan predicated the bulk of its margin expansion over the next two years.” It also pointed to “the potentially significant downside risk, both in trading prices over the near term and in achievement of the strategic plan over the next several years.”

The ISS judgment came as Signet reported first-quarter earnings that rose more than expected and guidance for second-quarter profits for which the current consensus estimate was the midpoint.

In the 13 weeks ended May 3, net income rose 5.2 percent to $96.6 million, or $1.20 a diluted share, from $91.8 million, or $1.13, in the 2013 quarter. Adjusted EPS of $1.29 beat consensus estimates by 2 cents.
Revenues rose 6.3 percent to $1.06 billion from $993.6 million as comparable-store sales increased 3.3 percent and e-commerce sales grew 24.4 percent to $38.7 million.

Second-quarter EPS is expected to range from 95 cents to $1.01, against a consensus estimate of 98 cents.

Zale on Tuesday reported a 74.6 percent advance in its third-quarter profits, to $8.8 million, as revenues fell 2.6 percent to $431 million. Comps were up 1.9 percent at constant currency and 0.6 percent in U.S. dollars.

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