Breakingviews: All that glitters in corporate finance isn’t gold

Published Fri, Aug 26 201612:17 PM EDTUpdated Fri, Aug 26 20161:14 PM EDT

Breakingviews

Sara Silver

Signet Jewelers ' shareholders were so dazzled by its 2014 $1.4 billion bid for rival Zales they bid the acquirer's shares way above the value of any future earnings from the deal. Two years later, nearly all the benefits of that transaction have tarnished like cheap silver. It's a salutary reminder that not all that glitters in corporate finance is gold. On Thursday, Bermuda-based Signet saw $940 million, or 13 percent of its market value, melt away after warning of lower sales and raising $625 million in a surprise cash injection from buyout firm Leonard Green & Partners. Under the terms of that financing, Signet issued securities granting the fund a 5 percent annual interest payment, a board seat and the right to convert them into common stock at an 18 percent premium to the average price of the shares over the next 20 days. Zales appears to be the culprit for the shock fundraising. Signet — whose store brands include Jared, Sterling, Kay Jewelers and Piercing Pagoda — said it booked losses as a result of "deferred revenue adjustments" related to the way Zales accounted for warranties it sells on some products. This added to concerns about Signet's portfolio of customer credit, which had swelled to $1.65 billion, and which is under strategic review. More from Breakingviews : Credit Suisse broking fail comes at unhelpful time All this has crushed the benefits of the Zales deal. When it was first announced in February 2014, Signet promised to harvest $100 million of annual synergies within three years. That more than merited the 41 percent premium Signet was handing over to Zales' owners in cash. Signet then gained some $1.7 billion of market cap in the months before it consummated the takeover. It's clear that investors were distracted by the bling, even if the company is on track to meet its targeted cost savings. The stock now stands just about where it was before announcing its bid for Zales, significantly underperforming the S & P 500 Index, which has gained 18 percent during that time. Since closing the purchase in May 2014, Signet has lost a fifth of its value. Academic studies suggest that most mergers fail to create value for stockholders. That didn't stop investors from bidding up the shares of acquisitive companies during the most recent boom in corporate matchmaking. Signet looks like a gilded souvenir that history repeats itself. For more independent commentary and analysis from Reuters Breakingviews, visit breakingviews.com

Zales Jewelers store

Justin Sullivan | Getty Images

Signet Jewelers' shareholders were so dazzled by its 2014 $1.4 billion bid for rival Zales they bid the acquirer's shares way above the value of any future earnings from the deal.

Two years later, nearly all the benefits of that transaction have tarnished like cheap silver. It's a salutary reminder that not all that glitters in corporate finance is gold.