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.

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