Signet to acquire Zale in $1.4 billion deal

WASHINGTON — Signet Jewelers Ltd., operator of the Kay and Jared brands, has 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 United States.

Signet is paying $21 in cash per Zale share, about 41 percent more than Zale’s closing price Tuesday. 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 Wednesday.

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 17 percent to $92.79 Wednesday morning in New York. The shares had already gained 28 percent in the past 12 months through Tuesday. Zale, which had more than tripled in the past year, rose to $20.90 Wednesday.

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 Wednesday. 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 Wednesday. 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.

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, Va. Still, fine jewelry and watch sales are outpacing the rest of the retail industry, rising 7.8 percent to $73 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.

The U.S. jewelery industry had struggled during the latest recession as consumers cut back on discretionary spending. Finlay Enterprises, Fortunoff Holdings and Whitehall Jewelers Holdings 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 advised Signet on the deal, and Weil, Gotshal &Manges provided legal counsel. Zale was advised by Bank of America and Cravath, Swaine &Moore.