The deal, which would combine the two largest U.S. mid-tier jewelry chains, Zales and Signet's Kay Jewelers, is valued at $21 per share. That is a premium of about 41 percent to Zale's close on the New York Stock Exchange on Tuesday. (Click here for the latest quote.)
"It unlocks new sources of growth," Signet Chief Executive Officer Michael Barnes said on a conference call.
The deal caps a multiyear turnaround for Zale, which in 2010 faced a liquidity crisis. The company's stock, which had traded as low as $3.76 in April, rose to $20.87 in early trading on Wednesday, while Signet was up 13.5 percent at $90. (Click here for the latest quote.)
In the United States, the companies would have a combined 16 percent share of the specialty jewelry market, which is highly fragmented, according to IBISWorld data.
Zale in 2010 faced a liquidity crisis after sales plummeted but has rebounded since then. In July, it reported its first profitable year since the 2008 financial crisis, and it recently announced strong sales for the 2013 holiday season.
Besides its namesake chain, Zale operates the successful Peoples Jewellers chain in Canada and is established in the growing outlets business.
Signet's British chains, H. Samuel and Ernest Jones, have been a drag on the company's sales.
The companies said that combining their operations would generate about $100 million annually in savings.
Zale will become a division of Signet. Zale CEO Theo Killion will manage that division after the deal, but will report to Signet CEO Barnes.
Including debt, the all-cash deal values Zale at about $1.4 billion, the companies said.
Signet said it had the support of private equity firm Golden Gate Capital, which owns about 22 percent of Zale. Golden Gate in 2010 gave a Zale a lifeline with a $150 million secured loan, in a deal that also gave it warrants to buy 11 million shares for $2 each.
Signet said it expected the deal to increase earnings by a high single-digit percentage rate, excluding acquisition costs, in the first year after closing.
The company said it expected to finance the transaction through bank debt, other debt financing and converting a significant portion of its accounts receivables into cash.
Signet said JPMorgan Chase had committed to provide bridge financing for the transaction. J.P. Morgan Securities acted as financial adviser to Signet, while Weil, Gotshal & Manges was legal counsel.
Bank of America/Merrill Lynch was financial adviser to Zale, and Cravath, Swaine & Moore acted as legal counsel.