Leave it to a couple of diamond dealers to show how to make mergers and acquisitions sparkle. The stock of the jewelry retailer Signet rose after it agreed to buy its smaller rival Zale at a 41 percent premium for an enterprise value, which includes debt, of $1.4 billion. That’s what happens when the cost savings effectively cover the purchase price. It makes the shareholder-unfriendly transactions involving Comcast and Jos. A. Bank all the more noticeable.
A good fit usually gets spotted by the market. Together, Signet, the Bermuda-based owner of Kay Jewelers in the United States and H. Samuel in Britain, and Zale, based in Dallas, will have over 3,000 shops selling engagement rings and other baubles. The companies expect to squeeze $100 million out of the combination annually. Taxed and capitalized, those cuts are worth about $700 million today, or just about what Signet is paying for Zale’s equity.
Investors are expecting even more, though. Signet’s shares jumped 17 percent on Wednesday, adding $1.1 billion to its market value. It’s simple, classic deal math that never goes out of style and also the sort that can cast other acquisitions in a poor light.
Comcast’s $45 billion plan to take over Time Warner Cable is one recent example. Comcast, the biggest cable operator in the United States has lost $7 billion in market value since announcing its intentions last week. That suggests owners other than the Roberts family, which controls a third of Comcast in perpetuity, expect the deal to destroy value. The same goes for Jos. A. Bank, the men’s clothier that is using the absurdly expensive tactics of another acquisition and a stock buyback either to goad or to evade its suitor, Men’s Wearhouse.
Signet waited for what seems like an unusually long time to capitalize on the evidently huge benefits of buying Zale. It is perhaps evidence of the hesitation in boardrooms globally to take a chance on mergers and acquisitions. The stark differences in market reception, however, are making it clearer when investors want a deal.
Jeffrey Goldfarb is an assistant editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
