TIG Advisors Reveals Stake in Zale Corporation (ZLC); Plans to Vote Agains Merger with Signet Jewelers Ltd. (SIG)

Carl Tiedemann and Michael Tiedemann‘s TIG Advisors has revealed adding Zale Corporation (NYSE:ZLC) to its equity portfolio. The fund revealed a 9.5% activist position that contains over 4.1 million shares of Zale. Moreover, TIG issued an investor presentation stating that they will vote against the deal between Zale and Signet Jewelers Ltd. (NYSE:SIG), under the terms of which the latter plans to acquire the former $21.00 per share.

Zale Corporation

Zale Corporation (NYSE:ZLC) and Signet Jewelers Ltd. (NYSE:SIG) entered into a merging agreement earlier this year, following which the stock price of Zale escalated and currently tops the offering price by over $1. In April, Zale, has disclosed in a statement that the date for the shareholders meeting has been set for May 29.

“Previously undisclosed* and compelling financial projections from Zale make it clear that the standalone value of Zale is worth well above trading levels seen before the deal was announced. Shareholders are not being paid a fair value for  the margin expansion opportunity they already own, much less a fair premium,” TIG Advisors said in its presentation.

The fund also stated that the deal significantly undervalues Zale Corporation (NYSE:ZLC) , which started to show improved results under the operation of the current management team. As TIG claims, the company is on the right path to achieve near-double-digit EBITDA margins in the fiscal year 2016.

In the past several quarters, Zale Corporation, a company engaged in retail of fine jewlery, posted earnings and revenues above the market expectations. For the second quarter of its fiscal 2014, its EPS amounted to $1.13, versus the consensus estimate of $1.04. For the full year, the company is expected to increase its earnings to $0.57 per share, versus $0.24 per share reported for the previous fiscal year.

“A more appropriate structure for the transaction would allow for Zale shareholders to materially participate in the value created by unlocking deal synergies. In our estimate, a deal structured of at least $12.50 of cash and 0.158 shares of Signet (worth ~$28.60 at the close on 5/8/13) subject to a shareholder election for those holders hoping to roll their stake into Signet represents an appropriate structure for such a deal. At these adjusted terms, we estimate the transaction to be ~20% accretive to Signet’s 2016 earnings. (On currently agreed upon terms and using Signet Management’s understated $100M synergy forecast, we calculate the Zale transaction as ~26% accretive to Signet holders.),” the presentation added.

In addition, TIG advisor said that before the acquisition, Zale Corporation (NYSE:ZLC) ’s shares were trading at an EV/EBITDA of around 9.1. In this way, the investor claims, taking into account the 2016 case estimate disclosed by the management, the company should sport a share price of $31.00, and even using the downside alternative, the share price should amount to $25.00, which is still below the Signet’s offering price.

As of the end of 2013, several “hedgies” have also been bullish on Zale Corporation (NYSE:ZLC) , as their 13Fs show. Alexander Mitchell of Scopus Asset Management initiated a stake in the company, the holding around 1.1 million shares, while Israel Englander of Millennium Management boosted his fund’s holding by nearly 150% to 375,300 shares.

Disclosure: none

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