This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Golden Gate Capital Strikes Gold in Diamond Deal

NEW YORK (TheStreet) -- Golden Gate Capital struck gold in a merger of diamond and jewelry retailers. The private-equity firm's $150 million rescue of Zale (ZLC) is in for a big payoff after the Dallas-based jewelry retailer agreed on Wednesday to be purchased by Signet Jewelers (SIG - Get Report) for $21 a share in cash, in a merger that will put Jared Galleria of Jewelry, Kay's and Zales under a single owner.

In 2010, Golden Gate Capital provided Zale Corp. a lifeline after a sharp downturn in the U.S. and global economy cut at the jeweler's earnings and tight credit markets put the company in a vulnerable financial position as its debts came to maturity. The PE firm, in May 2010, loaned Zale $150 million for five years and agreed to receive warrants for a 25% equity stake in the company on a fully diluted basis. That deal allowed Zale to avert a liquidity crisis and presaged Wednesday's merger with Signet Jewelers.

On both the loan and the warrants, Golden Gate appears to have struck a highly attractive deal and one reminiscent of the types of emergency investments that have been made famous by Warren Buffett of Berkshire Hathaway.

Golden Gate's $150 million loan carried interest costs of 15% per annum, 10% paid in cash and 5% eligible to be paid-in-kind. The loan was secured by a first lien claim to Zale's inventory and receivables, and gave the company the right to redeem the loan with a call premium of 10% in year one, 7.5% in year two, 5% in year three, 2.5% in year four and 0% in year five. On any measure, Golden Gate's loan now looks like a savvy deal for the PE fund.

Must Read: Family Shareholders Cede Control of Peugeot

But warrants Golden Gate asked for in the deal may prove to be the biggest money maker for the private-equity firm.

Golden Gate's warrants in Zale shares carried an exercise price of $2 a share, meaning the firm had the right to purchase $11.1 million shares of common stock. After Signet's $21 a share cash offer, those warrants are now in the money by more than $200 million.

Golden Gate also asked for two seats on Zale's board. Currently, Neale Attenborough and Josh Olshansky are representatives of the firm on Zale's board.

The deal allowed Zale to repay some of its debts and revise the company's outside financing and extend the duration of its debts. Zale used Golden Gate's loan to repay its outstanding bank debt at the time and open a new facility due in April 2014 instead of August 2011. GE Capital and Wells Fargo participated in Zale's new bank debt facility and the company also signed on TD Financing Services to offer a retail partner card with the company, replacing a relationship the company had with Citigroup.

Overall, the financing appears to have allowed Zale to recover from the recession and recover most of the stock market value it lost during the crisis. Zale prepaid $60.5 million of its Golden Gate loan in a July 2012 refinancing. That deal also allowed Zale to amend and extend its remaining $80 million term loan with Golden Gate.

In 2013, Zale returned to profitability after years of successive losses. In October, the company filed to allow Golden Gate to exercise its $2-a-share stock warrants on a cashless basis. Golden Gate now appears poised to exit its stock holding from that warrant transaction in Signet's acquisition, and at a significant profit.

Signet's offer values Zale at about $1.4 billion, when including debt, or an enterprise value of 7.4 times the company's trailing 12-month adjusted earnings before interest, taxes, depreciation and amortization.

Golden Gate Capital said on Wednesday it was the beneficial owner of approximately 22% of Zale's common stock and it has agreed to support the terms of Signet's offer.

Zale shares were trading higher on Wednesday by about 40% to $20.90. Signet shares were also trading higher by over 14% to $90.50.

J.P. Morgan acted as exclusive financial adviser and provided a fairness opinion to Signet's board. The bank also committed to provide bridge financing for the transaction. Weil, Gotshal & Manges acted as legal counsel to Signet. BofA Merrill Lynch acted as financial adviser and Cravath, Swaine & Moore acted as legal counsel to Zale.

-- Written by Antoine Gara

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
SIG $130.88 -0.39%
ZLC $21.02 -0.66%
AAPL $117.23 -0.90%
FB $106.91 2.60%
GOOG $768.16 3.40%


Chart of I:DJI
DOW 17,868.78 +148.86 0.84%
S&P 500 2,097.67 +17.26 0.83%
NASDAQ 5,147.3470 +38.6810 0.76%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs