Note to jewelers: Here’s a lesson on how to get your act together and groom yourself for a marriage made in heaven.
Mall-based giant Zale Corp., which had teetered on the edge of insolvency during the Great Recession, has cut a deal to merge with Signet, the owner of arch-rival Kay Jewelers, for $1.4 billion including debt.
The surprise Wednesday deal values Zale, which also owns the Gordon’s chain, at $690 million, or $21 a share, a 41 percent premium to its closing price on Tuesday.
That’s a far cry from four years ago, when Zale stock had dipped below $2 under then-Chairman Richard Breeden, a former head of the Securities and Exchange Commission.
Wall Street cheered the prospects of the combined company, which will boast $6.2 billion in sales, and whose 3,600 stores will enjoy greater leverage over suppliers and landlords.
To underscore that point, shares in both companies soared — Zale by 40 percent and, interestingly, Signet by 18 percent.
“It was a deal that made a lot of sense,” Signet Chief Executive Michael Barnes said. “It is very complementary. By combining the two companies, it could help us grow faster and further.”
Shares of Signet, a Bermuda-based retailer with its roots in the UK, soared $14.38 to $93.65.
Insiders credit the unlikely Zales turnaround to the team of Chief Executive Theo Killion and Chairman Terry Burman, whose success has reaped a bonanza of more than $200 million for backer Golden Gate Capital.
In 2010, the San Francisco private-equity firm extended a $150 million term loan to see Zale through a brutal liquidity crisis.
As part of that deal, Golden Gate got 22 percent of Zale’s now-buoyant stock.
Under the unusual financing arrangement, insiders note that Golden Gate could have reaped a big payday even if Zale had gone under, as it would have seized control in a bankruptcy.
Seeing a chance to save the company, Killion initially took the helm on an interim basis in January 2010.
In the 2009 holiday season, Zale had been forced to cancel orders, a desperate and rarely used maneuver that alienated suppliers — but saved the ailing company cash.
At the time, sources said, Signet briefly had weighed an acquisition of its struggling rival, whose shares had been beaten down by the recession and debt from a string of burdensome acquisitions.
Under Breeden’s watch, critics said, Zale had squandered millions on ill-advised stock buybacks at prices above $20 a share.
Closing more than 400 stores, Killion’s team returned the chain to profitability just last year after several seasons of steadily improving sales.
Burman, meanwhile, joined Zale’s board less than a year ago after stepping down as Signet boss. As a result of the merger, Burman will cash in more than $2 million in stock grants he was given for joining the board.
Barnes had been eyeing Zale since he took the top job at Signet three years ago, coveting especially the company’s Peoples Jeweller stores in Canada, which number nearly 200.