Signet-Zale: The culmination of consolidation

in the world, and this is a good way to do it,” Ellis said. “They were a powerhouse and they are now, overnight, becoming an even more dominant player.”

By the numbers
The number $690 million was widely reported as the purchase price for Zale when news of the deal broke Wednesday morning. That figure later was revised upward to $900 million.

However, when factoring in the warrants owned by private equity firm Golden Gate Capital, which has a 22 percent stake in Zale, and Zale’s debt, the deal is valued at a total of $1.4 billion.

Janowski said when it’s broken down, the $1.4 billion price tag adds up to a deal for Signet.

The purchase price is well less than $1 million per store, especially when factoring in the online operations and accounting for the fact that Zale’s store count of 1,679 includes 624 Piercing Pagoda kiosks, which are not full-line jewelry stores.

He said when Sterling Jewelers was gobbling up smaller chains in the 1980s and 1990s, the typical price was $1 million a store, which would be much more in today’s dollars. “When you are buying something like this and it’s, give or take, $1 million a store, you are paying as much as you did with much better dollars than you did 25 years ago.

“This whole business has not gone very far. In fact, it’s gone down. It’s an indication that Zale finally had to make some kind of move. They were not getting out of the morass that they were in.”

Before the merger is final, the deal has to be approved by regulators and Zale’s shareholders.

If it goes through, the transaction will merge the two largest jewelry chains in the United States, creating a chain of more than 3,600 stores in the U.S., Canada and the United Kingdom that generate more than $6 billion in annual sales and employ close to 30,000. Stores operating under this umbrella will include well-known brands such as Zales, Piercing Pagoda, Kay Jewelers, Jared the Galleria of Jewelry and Peoples Jewellers in Canada.

In a presentation given Wednesday morning, Signet said the combination creates a “more diversified” retailer with a total of 3,653 stores in three countries. It said it plans to invest in and grow Zales’ brands, while operating them as a standalone portfolio within Signet, with CEO Theo Killion still at the helm.

Analysts, however, say that the chain won’t remain at 3,653 stores for the long term.

Ellis says eventually there will be consolidation in markets where there is duplication.

In some cases, the company may opt to keep multiple stores open in the same market because it works. “(But) it doesn’t work everywhere,” he said. “If there was no consolidation, there would be no point in making the acquisition, would there?

“I think it’s a pretty safe to assume you are not going to have Kay and Zales in the same mall.”

Janowski agrees, adding that while the further consolidation of the mall jewelry business could have a positive impact on other mall jewelers that may have one less competitor, it won’t mean much for independents, many of whom long ago abandoned the malls’ halls.

“You are not going to see duplication of efforts in the same market,” he said. “I think Canada is the big pickup (in this deal.)”

The potential acquisition of Zale gives Signet a foothold of 199 Peoples and Mappins stores in Canada, a market where it previously had no stores, as well as approximately 125 Zales Outlet stores in the U.S. and Puerto Rico, a space in which Signet has been keen on expanding recently.

RELATED STORY: Sterling completes $57M Ultra acquisition

The company’s last big acquisition, completed in November 2012, was of Ultra Stores Inc., operator of Ultra Diamonds outlets, which it is converting into Kay Outlet stores.

Who’s next?
Signet’s 2012 acquisition of the Ultra stores was followed by Swatch Group’s $1 billion purchase of the Harry Winston name and retail chain from Harry Winston Diamond Corp. in 2013. The company formerly known as Harry Winston Diamond Corp. is now Dominion Diamond Corp. and its sole business is diamond mining.

RELATED CONTENT: Swatch buys Harry Winston retail

While there has been plenty of consolidation at the manufacturing end of the business, neither Janowski nor Ellis could give a solid prediction as to what the next major retail merger might be in the U.S. market.

“I don’t think in retail there is anything that leaps off the page at me,” Ellis said. “I think there will be a lot of activity further up the supply chain.”

New York-based retailer Tiffany & Co. has been mentioned as a prime acquisition target for one of the world’s luxury goods conglomerates, such as LVMH Moët Hennessy Louis Vuitton, which snapped up Bulgari in 2011, or Kering (formerly PPR), which bought a majority stake in Pomellato last year.

Janowski said the brand recognition the 177-year-old retailer garners is enough to make the conglomerates “salivate” at the thought of acquiring Tiffany. None of the other big jewelry stores lining the tony stretch of Fifth Avenue just south of Central Park--Bulgari, Wempe, Cartier, Van Cleef & Arpels--have the same draw as the Tiffany store, he said.

“Who knows?” if Tiffany will be acquired one day, Janowski said. “It’s almost impossible to predict that. Certainly they have said no to all those possible inquiries that have come up in the past.”

But that doesn’t mean, at some point, a company won’t make the venerable retailer an offer it simply can’t refuse, he added. “There’s no way to know that."