Kays Jewelry In Merger Talks With Zales

LONDON, Saturday, July 31, 2010 (Reuters)

British jewelry retailer Signet Group Plc (SIG) the parent company of Kays Jewelry is in talks about a potential tie-up with U.S. rival Zale Corp. (ZLC), the Financial Mail reported on Sunday.

Zale approached Signet in the past few months, and talks were at an early stage, the newspaper said, without citing sources.

It was unclear what form a deal would take, but a takeover by Signet of smaller rival Zale is more likely than a merger, the newspaper said.

A spokeswoman for Signet declined to comment.

Signet makes about three-quarters of its sales in the United States, where it trades as Kay Jewelers and Jared The Galleria of Jewelry.

This news comes as no surprise based on all the trouble surrounding Zales this year both in wrong doings by it's senior management and the huge loss of profits these last couple of years.

I guess I wasn't the only one who thought that maybe Zale(NYSE: ZLC) could or should be bought down in the low $20s.

Over the weekend, reports came out that Zale and Britain's Signet(NYSE: SIG) were talking merger, and Signet confirmed that talks have in fact taken place, though a deal is apparently not done.

A deal would make a certain amount of sense. Signet does well in the mid-market U.S. retail jewelry business (through Kay and Jared), but doesn't really compete on either the higher end (where Zale has Bailey Banks & Biddle) or the lower end (where Zale has Piercing Pagoda). And the combination would definitely be a more formidable bricks-and-mortar competitor to other mass-market retailers that also sell jewelry (like Wal-Mart(NYSE: WMT)).

The deal would also fit in with some of the rumblings that Signet might want to get rid of the underperforming British business and just focus on the U.S. operations. After all, not only has the financial performance there been disappointing, but as a reader emailed to me, the store operations across the pond are a mess as well (at least in a few stores).

And it might be that Signet already has a willing bidder for those operations. Gerald Ratner, who ran Signet prior to referring to some product(s) as "total crap," has gotten back into the jewelry business and supposedly has said that he'd be interested in the British operations if they were for sale; whether he can actually find the capital for it is a separate question.

Since Signet dwarfs Zale in market cap and revenue, I don't see how this is anything but an acquisition by Signet. By the same token, it'll need to tread carefully. Zale is down but not out, and situations like these call for a bit of tact and soft-stepping, lest the target thinks it is simply the recipient of an opportunistic bid.

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