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) 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.