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IG Advisors, LLC a stockholder of Zale Corporation
ZLC (“Zale”
or the “Company”), owning approximately 9.5% of its outstanding shares of
common stock, today responded to Institutional Shareholder Services (“ISS”)
recommendation to Zale stockholders in respect of the proposed merger with
Signet Jewelers Limited
SIG (“Signet”) for $21 per share in cash.
TIG Advisors filed a presentation with the SEC today that details its concerns
with ISS' analysis and conclusions.
“We disagree with many of ISS' fundamental assumptions and calculations in
arriving at a value for Zale. ISS has unilaterally chosen to discount Zale
Management's downside case in arriving at a pre-announcement standalone value
for Zale. ISS makes a mathematical error in calculating the implied share
price. Using its own arguments but correcting its mathematical mistake, ISS
should have concluded that Zale's standalone price is ~$21.76, not the $15.60
that ISS claims. We believe this error is a major flaw that leads directly to
ISS' incorrect recommendation,” said Drew Figdor, Portfolio Manager.
“Our communications with shareholders show that the investor sentiment is at
odds with ISS' recommendation, and we expect that institutional shareholders,
acting as fiduciaries, will form their own independent opinions about the
proposed merger. ISS chose an incomplete and inappropriate set of precedent
transactions, omitting two recent jewelry retailer transactions and including
instead apparel deals, the sale of a chain of candle stores and a retailer of
video games.”
“ISS also ignored the raft of conflicts we identified in the deal negotiation
process, including the role of Golden Gate Capital, and BofA, which in our
view substantially taint the outcome of the process. ISS also failed to
address the dated nature of Management's projections. As we have demonstrated,
the proposed merger with Signet represents an inequitable distribution of
value. We call on all of our fellow stockholders to join us in voting AGAINST
the merger.”
TIG Advisors believes that ISS' analysis was flawed in a number of material
respects including:
* ISS discounted Management's alternative downside EBITDA forecast by an
additional 10% to arrive at a $15.60 implied pre-announcement value for
Zale shares. In fact, using ISS' stated inputs, TIG Advisors calculated a
pre-announcement value of $21.76 for Zale shares – a 39% variance from
ISS' calculations.
* In calculating the split of the synergies shared between Zale and Signet,
ISS creates their own Discounted Cash Flow analysis. ISS claims to use a
Working Average Cost of Capital (“WACC”) based on the fairness opinion
rendered by BofA. Unfortunately, ISS uses a WACC ranging from 12-16% but
the fairness opinion actually uses a WACC ranging from 11-13% when
analyzing Zale's prospective cash flows. It appears to us that ISS made a
mistake and used the estimated cost of equity that BofA had used, not the
WACC. We believe the market will value deal synergies at or below Signet's
WACC.
* TIG Advisors strongly disagrees with ISS' contention that Zale's
shareholders are capturing a substantial portion of the deal synergies.
TIG Advisors believes that there are $220 million of EBITDA of potential
margin improvement and synergies available through the merger, or
approximately $2.75 of incremental EBITDA per Signet share. With Signet
trading at approximately 9.5x 2016 EBITDA estimates, that translates to
approximately $26.00 in potential share price appreciation. We continue to
believe the sustained value accretion in Signet stock since the
announcement of the Zale merger is attributable to the unrecognized value
in Zale and the potential synergies created by the proposed merger. The
$21 per share offer represents an inequitable distribution of value.
* ISS relies on precedent transactions for retailers outside of the jewelry
sector including apparel, electronics and a seller of scented candles –
but curiously omitted recent jewelry deals including the sale of Harry
Winston to Swatch in 2013 for 24x and the sale of Bulgari to LVMH in 2011
for 27x.
* ISS fails to adequately recognize the potential upside available to Zale
shareholders as a result of the turnaround underway. ISS admits in its
report that “LTM performance may well be a poor indicator of where the
company is truly headed. Investors who rely on trailing valuation metrics
alone, or even principally, risk significant truncation of value.”
* ISS appears to have ignored the numerous potential conflicts on the part
of Golden Gate Capital and BofA in the negotiation process that TIG
Advisors had voiced concerns about.
Right Deal – Wrong Price
TIG Advisors believes the current offer to Zale shareholders of $21 per share
in cash is below the standalone value of Zale, and does not account for the
potential synergies or upside potential of the combined company. Since the
deal was announced, Signet shareholders have enjoyed approximately $1.4
billion of value accretion, an amount 5x the $286 million deal premium paid to
Zale stockholders.
TIG Advisors has launched this action to protect the interests of all Zale
stockholders. We urge you to join us in voting the enclosed BLUE proxy card by
internet, telephone or mail AGAINST the approval of the Merger Agreement and
related compensation proposals at the Special Meeting. Alternatively, you may
use management's white proxy card to vote AGAINST the proposals.
Even if you have previously deposited a management white proxy card in support
of the proposals, you can still change your vote by voting your BLUE proxy
AGAINST the merger.
If you have any questions or require assistance in voting your proxy, we
encourage you to contact Charlie Koons 212-929-5708 or Larry Dennedy
212-929-5239 at MacKenzie Partners.
About TIG Advisors
TIG Advisors, LLC ("TIG") is an SEC registered investment adviser. Founded in
1980, the firm is engaged in the active management of alternative investment
funds and their underlying businesses. The company seeks to partner with
experienced and talented portfolio managers that it believes have proven and
repeatable investment processes. The firm strives to provide a platform for
managers to preserve the culture, philosophy, and research capability that is
distinct to their investment discipline, while also drawing on the
institutional infrastructure of TIG.
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