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Signet and Zale tie the knot, create mall-based jewelry giant

May 29, 2014, 8:12 PM UTC

After a three-month engagement, it’s official: Signet Jewelers (SIG) and Zale (ZLC) got hitched on Thursday in a $690 million deal that brings the two largest U.S. mid-tier specialty jewelers, longtime rivals Kay and Zales, together under the same roof.

The acquisition makes Signet, already the largest U.S. operator of jewelry stores before the deal, almost three times bigger than the upscale Tiffany & Co. (TIF) in terms of U.S. sales, with a market share of 14.6% including Zale, according to Euromonitor International data.

The tie-up will make Signet a player in Canada, where Zale operates the popular Peoples Jewellers chain. It also gives Signet a big presence in the growing jewelry outlet business, where Zales is a leader, far ahead of Kay.

What’s more, Signet has said the deal will give it more clout with diamond vendors, which will be helpful as Kay, Zale and Signet’s higher end Jared chain focus more on their bridal businesses, the bread and butter for jewelers.

In February, Signet offered $21 a share for Zale, which last year posted its first annual profit since the before recession.

But Zale’s attractiveness wasn’t always so evident: the company nearly ran out of cash in 2010 after its price-sensitive shoppers stopped coming in during the recession. Zale had a major hand in its own problems when it cut orders right before the Christmas of 2009, and inadvertently sent many customers and vendors into Signet’s arms.

Zale pulled off a spectacular turnaround, helped in part by lines such as Vera Wang-designed bridal jewelry and by cutting hundreds of stores.

The transaction means a big payday for private equity firm Golden Gate Capital, which gave Zale a $150 million lifeline in 2010 and holds about 22% of Zale shares. That 2010 loan gave Golden Gate warrants to buy 25% of the retailer’s shares at $2 apiece.

Even though Zale shares rose more than five-fold in the year before that offer, thanks to Zale turnaround, the sale ran into some opposition, most notably from New York-based hedge fund TIG Advisors, which owned 9.5% of Zale and wanted Signet to raise its offer. But on Thursday, Zale shareholders approved the deal.

Signet operates 1,400 U.S. stores, Zale has about 800 Zales and Gordon’s Jewelers stores, as well as 630 Piercing Pagoda mall kiosks. Zale will become a division of Signet.