Zale Corporation (“Zale” or the “Company”) (NYSE: ZLC) today
sent the following letter to TIG Advisors, LLC (“TIG”) responding
to the numerous inaccuracies and misrepresentations put forth by
TIG with respect to the proposed transaction with Signet Jewelers
Limited (“Signet”), under which Zale stockholders will receive
$21.00 cash per share consideration.
The full text of the letter from Terry Burman, Chairman of the
Zale Board of Directors, on behalf of the Zale Board of Directors,
to Drew Figdor, Portfolio Manager at TIG, follows:
May 20, 2014
Dear Mr. Figdor:
On behalf of Zale Corporation (“Zale” or the “Company”) and its
Board of Directors, I am writing in response to the presentations
and letters you have issued regarding the Company’s pending
transaction with Signet Jewelers Limited (“Signet”).
We welcome your viewpoints and opinions, as we do with all other
Zale stockholders; however, our Board believes that the Signet
transaction, which was the outcome of a thorough and comprehensive
process and extensive negotiations with Signet, is in the best
interests of the Company’s stockholders as it provides a
substantial premium, certain and immediate liquidity and compelling
value to all Zale stockholders. As such, the Board has unanimously
approved the transaction with Signet.
We are taking this opportunity to set the record straight on the
numerous inaccuracies and misrepresentations asserted by TIG
Advisors, LLC (“TIG”) in its recent communications, which exemplify
TIG’s approach to this investment as short-term opportunists who
are clearly ignoring the risks they are imposing on Zale’s
long-term stockholders.
TIG Assertion: The merger fails to provide fair value.
The facts: The Board determined that the $21.00 cash per share consideration represents immediate
and certain value for the Company’s stockholders, providing a
compelling present value for achieving the EBITDA targets in the
Company’s three-year business plan, while also eliminating the risk
to Zale stockholders of failing to achieve those
targets.
The Board’s assessment of the Company’s value on a standalone
basis relative to $21.00 cash per share took into account the
detailed analyses presented to the Board that included:
- Comparable public companies analysis
using the FY2016 EBITDA and EPS for both the three-year business
plan and the alternative case, and not last twelve month
numbers;
- Discounted cash flow analysis for both
the three-year business plan and the alternative case; and
- Relevant precedent specialty retail
acquisition transactions.
The Board also weighed the uncertainties associated with
executing the continued turnaround of Zale in a difficult
macroeconomic climate and highly competitive retail environment,
among other factors.
In contrast to this robust valuation analysis, TIG simply
applies the “Street Analyst’s” 9.1x EBITDA multiple of the day
before the transaction announcement to the Company’s three-year
business plan FY2016 EBITDA of $200 million. This valuation is
flawed because, if the Company’s EBITDA margins normalize and
EBITDA rises, the Company’s trading multiple would likely fall. It
is illogical to apply a 9.1x multiple that reflects the current
analyst expectation of the Company’s margin growth to the FY2016
EBITDA in the three-year business plan or the alternative case,
each of which assumes a more normalized EBITDA margin. A more
appropriate analysis would reflect the expectation that Zale would
trade at a multiple similar to other mature mid-market specialty
retailers with stable operating margins.
For these and other reasons outlined in the proxy statement
filed with the SEC on May 1, 2014, the Board unanimously approved
the transaction.
TIG Assertion: The three-year plan is not a “stretch” plan and
the financial targets are “in fact realistically achievable.” Zale
management and the Board created a “lower alternative case to
justify the deal price”.
The facts: Consistent with best practice for retail
companies, the Company’s three-year business plan was designed to
challenge management, including by more than doubling the EBITDA
target from FY2014 to FY2016, and was aligned accordingly with the
Company’s long-term incentive plan. Achieving
the FY2016 plan would result in a maximum bonus payout (200%) under
the long-term incentive plan.
TIG itself notes that management’s execution was “very
effective” in FY2013, and points out three of the five executive
officers achieved 95% of their target payout that fiscal
year. In making this point, TIG has reinforced Zale’s view that a
95% level of performance is effective. Under
the long-term incentive plan, if Zale achieves approximately $155
million of EBITDA in FY2016, management would earn a target
payout of 75% to 125%.
Due to the stretch nature of the three-year business plan, the
Board also considered a less aggressive alternative case which
still reflected significant improvement in revenue growth and
operating margins. Notably, achievement of the alternative case of
$172 million of EBITDA in FY2016 would also result in an incentive
payout in excess of 100% of target, reflecting the operational
improvement required to achieve the alternative case.
Signet’s $21.00 cash per share offer price provides Zale
stockholders with a compelling present value for achieving the
EBITDA targets in the Company’s three-year business plan, and
eliminates the risks to Zale stockholders of failing to achieve the
three-year business plan or the alternative case.
TIG Assertion: Signet’s market capitalization upon announcement
increased by $1.4 billion, and this increase is entirely attributed
to the value unlocked by the transaction.
The facts: On the day of Zale transaction announcement,
Signet’s stock price increased 18% or $1.2 billion in market
capitalization. Concurrent with the announcement of the acquisition
of Zale, Signet also announced its intention to securitize certain
of its receivables and increase leverage on its balance sheet –
acts which certain investors had been pressing Signet to take.
Either securitizing receivables or leveraging
Signet’s balance sheet could have been executed absent the Zale
acquisition and had Signet used such proceeds to repurchase common
stock, it could have resulted in material earnings
accretion.
TIG Assertion: At the time of the announcement, the Company’s
actual results exceeded the projections included in the three-year
business plan and the offer price of $21.00 per share in cash is
based on “stale financial forecasts”.
The facts: Zale’s actual revenues for the first two
quarters of FY2014 fell below the levels set forth in the initial
three-year business plan. Accordingly, FY2014 revenue in the
three-year business plan was revised down and this revised plan was
what the Board considered in its evaluation. Contrary to being “stale”, the three-year business plan
and the financial results that were reviewed by the Board and made
available to its financial advisor when evaluating the $21.00 offer
price represented the most up-to-date information
available.
TIG Assertion: Zale’s stock price was “depressed as a result of
Golden Gate’s stated intention to dispose of its interest in Zale”
on October 3, 2013.
The facts: On October 1, 2013, the day before a
registration statement covering the sale of the shares underlying
Golden Gate’s warrants was filed, Zale’s stock price closed at
$15.51 per share. The following day, Zale’s stock closed at $14.64
per share but, one day later, the stock rebounded and closed at
$15.75 per share. Zale’s stock also traded at a 5-year high between
the time the registration statement was filed and the announcement
of the transaction with Signet.
TIG Assertion: Signet will benefit from the Company’s initial
strategic turnaround results, as opposed to the long-term
stockholders who have waited for the underlying value of their
shares to be unlocked.
The facts: In the year prior to the
announcement of the Signet transaction, Zale’s stock price
increased from $4.84 per share on February 19, 2013 to $14.91 per
share on February 18, 2014, representing a 3x return.
Further, Signet’s $21.00 cash per share consideration represents an
additional 41% premium over the closing
price of the Company’s common stock on February 18, 2014,
the day before the Signet transaction was announced.
As a result of the transaction, a stockholder of the Company who
purchased its stock six months prior
to the announcement of the transaction with Signet would now be
receiving a nearly 2.5x return
following the transaction, and a stockholder who purchased its
stock one year prior to the
announcement would now be receiving more than
a 4x return.
TIG’s short-term strategy puts the recognition of these
additional gains at risk for Zale’s long-term stockholders.
TIG Assertion: The Zale sale process was “replete with numerous
conflicts of interest” relating to Golden Gate Capital’s
involvement and representation on the Negotiation Committee, as
well as the involvement of Bank of America.
The facts: Being a significant stockholder does not
create a conflict of interest. To the
contrary, Golden Gate’s significant holdings in the Company align
its interests in maximizing the equity value of Zale with the other
stockholders of the Company, particularly those who have been
long-term stockholders.
In addition, the involvement of a director nominated by Golden
Gate on the Negotiation Committee did not create a conflict of
interest. The Negotiation Committee did not have any independent
authority in negotiating the transaction with Signet. It simply
facilitated the deal process while operating within specific
parameters that were set by the full Board, including pricing,
which was determined by the full
Board.
The Company’s strong and independent Board conducted a thorough
review of BofA Merrill Lynch’s contacts with Signet and concluded
that they did not impact the Board’s view that the transaction with
Signet provides immediate, certain and compelling value for the
Company’s stockholders.
TIG Assertion: The Merger Agreement with Signet did not contain
a “customary ‘go-shop’” provision that could help maximize value
for stockholders.
The facts: Far from customary, “go-shop” provisions are
rare in corporate-to-corporate M&A transactions. As part of its
thorough and comprehensive review process, the Board considered
other potential acquirers and determined that it was unlikely that
any of them would make an offer to acquire the Company that would
provide better value for Zale stockholders. The merger agreement
with Signet also allows the Board to consider unsolicited
alternative proposals that could create greater value for Zale
stockholders.
In the three months since the Signet
transaction was announced, no competing offers have been submitted
and no other parties have expressed interest in acquiring
Zale.
In closing, we believe it is important to reiterate the
considerable merits of this transaction and to convey the Board’s
unanimous view as to why we recommend that all Zale stockholders
vote in favor of the Signet transaction:
- Signet's $21.00 cash per share price
provides a substantial premium and immediate liquidity to Zale
stockholders.
- Zale’s strong and independent Board,
with substantial retail and jewelry industry experience,
unanimously approved the transaction with Signet.
- The Signet transaction represents
immediate and certain value for the Company’s stockholders,
providing a compelling present value for achieving the EBITDA
targets in the three-year business plan, while also eliminating the
significant risk to Zale stockholders of failing to achieve those
targets.
- Since the transaction was announced on
February 19, 2014, no other parties have expressed interest in
acquiring Zale.
- Importantly, there is risk of a
material decline in the Company’s share price if the transaction
does not close.
Sincerely,
Terry Burman
Chairman of the Zale Board of Directors
YOUR VOTE IS IMPORTANT - PLEASE VOTE
FOR THE SIGNET TRANSACTION TODAY
Your vote is extremely important, no matter how many or how few
shares you own. The affirmative vote of holders of a majority of
Zale’s outstanding shares is required to approve the proposal to
adopt the merger agreement. Failing to vote has the same effect as
a vote against the proposal to adopt the merger agreement. Please
take a moment to vote FOR the proposal to adopt the merger
agreement today - by telephone, by Internet or by signing, dating
and returning your proxy card.
For more information, please see Zale’s definitive proxy
statement, which was filed with the SEC on May 1, 2014. Zale urges
all stockholders to review the definitive proxy statement and other
materials as they contain important detailed information about the
merger agreement and the reasons why the Zale Board approved the
merger agreement. Stockholders who have any questions or need
assistance voting their shares should contact Zale’s proxy
solicitor, D.F. King & Co., Inc., toll-free at (800) 488-8095
or via email at zale@dfking.com.
About Zale
Zale Corporation is a leading specialty retailer of diamond and
other jewelry products in North America, operating approximately
1,680 retail locations throughout the United States, Canada and
Puerto Rico, as well as online. Zale Corporation's brands include
Zales Jewelers, Zales Outlet, Gordon's Jewelers, Peoples Jewellers,
Mappins Jewellers and Piercing Pagoda. Zale also operates webstores
at www.zales.com, www.zalesoutlet.com, www.gordonsjewelers.com,
www.peoplesjewellers.com, and www.pagoda.com. Additional
information on Zale Corporation and its brands is available at
www.zalecorp.com.
Safe Harbor for Forward-Looking Statements
Any statements in this communication about Zale’s expectations,
beliefs, plans, objectives, prospects, financial condition,
assumptions or future events or performance that are not historical
facts, including statements regarding the proposed acquisition of
Zale by Signet (the “proposed transaction”) and the expected
timetable for completing the proposed transaction that are not
historical facts, are forward-looking statements. These statements
are often, but not always, made through the use of words or phrases
such as “believe,” “anticipate,” “should,” “intend,” “plan,”
“will,” “expect(s),” “estimate(s),” “project(s),” “positioned,”
“strategy,” “outlook” and similar expressions. All such
forward-looking statements involve estimates and assumptions that
are subject to risks, uncertainties and other factors that could
cause actual results or events to differ materially from those
expressed in the statements. Among the key factors that could cause
actual results to differ materially from those projected in the
forward-looking statements, are the following: the parties’ ability
to consummate the proposed transaction on the expected timetable or
at all; the conditions to the completion of the proposed
transaction, including the receipt of stockholder approval;
operating costs, customer loss and business disruption (including
difficulties in maintaining relationships with employees,
customers, competitors or suppliers) may be greater than expected
following the announcement of the proposed transaction; the
retention of certain key employees of Zale may be difficult; Zale
is subject to intense competition and increased competition is
expected in the future; and general economic conditions that are
less favorable than expected. Additional information and other
factors are contained in Zale’s Annual Report on Form 10-K for the
fiscal year ended July 31, 2013 and subsequent reports on Form 10-Q
and Form 8-K filed with the Securities and Exchange Commission
(“SEC”). Because the factors referred to above and other risk
factors, including general industry and economic conditions, could
cause actual results or outcomes to differ materially from those
expressed or implied in any forward-looking statements, you should
not place undue reliance on any such forward-looking statements.
Further, any forward-looking statement speaks only as of the date
of this communication, based on information available to Zale as of
the date hereof, and Zale disclaims any obligation to update any
forward-looking statement to reflect events or circumstances after
such date.
Use of Non-GAAP Financial Measures
This communication contains a non-GAAP measure as defined by SEC
rules. This non-GAAP measure is EBITDA, which is defined as
earnings before interest, income taxes and depreciation and
amortization. We believe this measure could be useful in evaluating
the merger. This non-GAAP measure should not be considered in
isolation from, or as a substitute for, financial information
presented in accordance with GAAP, including net earnings (loss).
The Company's calculation of this non-GAAP measure may differ from
others in its industry and is not necessarily comparable with
similar titles used by other companies. Please refer to the
appendix of the Company’s investor presentation, which is available
on the Company’s website at www.zalecorp.com/merger and is an
exhibit to the Current Report on Form 8-K filed with the SEC by the
Company on May 13, 2014, for a reconciliation of this non-GAAP
measure to the most comparable GAAP financial measure.
Zale CorporationRoxane Barry, 1-972-580-4391Director of
Investor RelationsorD.F. King & Co., Inc.Kristian Klein,
1-212-232-2247orJoele Frank, Wilkinson Brimmer KatcherMatthew
Sherman, 1-212-355-4449orKelly Sullivan, 1-212-355-4449orEric
Brielmann, 1-212-355-4449
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