TIG Advisors Disagrees with ISS Recommendation to Zale Shareholders
May 23, 2014
ISS fails to recognize standalone value of Zale, and ignores
numerous conflicts of interest identified by TIG Advisors
Zale merger with Signet represents an inequitable distribution of
NEW YORK--(BUSINESS WIRE)--
TIG Advisors, LLC (“TIG Advisors” and together with its affiliates the
“TIG Advisors Group” or “we”) a stockholder of Zale Corporation
(NYSE: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 (NYSE: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
“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
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
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 allZale 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
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.