TIG Advisors Disagrees with ISS Recommendation to Zale Shareholders
23 Mayo 2014 - 1:50PM
Business Wire
- 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 value
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
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.
Investor ContactMacKenzie Partners, Inc.Charlie Koons,
212-929-5708ckoons@mackenziepartners.comorLarry Dennedy,
212-929-5239ldennedy@mackenziepartners.comorMedia
ContactBayfield Strategy, Inc.Riyaz Lalani,
416-907-9365rlalani@bayfieldstrategy.com
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