Update on Zale: Will It Merge With Sterling?

UPDATE on the Update: Zale just sold Bailey Banks and Biddle to Finlay.

Following up on last week’s post on Zale, several other investment firms are now buying into the company: 

Citadel Investment Group, a $16 billion fund based in Chicago, reported in a Securities and Exchange Commission filing that it had acquired [5.3% of Zale], indicating that managers there believe Breeden may be successful at influencing the long-term stock price of the company.


And. according to this, another hedge fund, SAC Capital, has also disclosed a 5.1% “passive stake” in Zale (as opposed to Breeden’s “active stake.”)


I should note I have gotten this comment from David Sternblitz, Zale’s always courteous spokesperson, about Breeden’s recent purchase:


We’ve had a great dialogue with Breeden Capital. They see the company as undervalued, as we do. We are very open to having conversations and listening to any conversations that may improve the business or increase shareholder value. It’s been a very good relationship to this point.


One thing Breeden was apparently successful at doing when it got involved with Applebee’s was getting the chain to sell to rival IHOP. Which of course brings up speculation that it will pressure Zale to merge with Sterling. As this piece notes:


Zale’s [recent] decision to eliminate division presidents and centralize its buying organization, which mirrors Kay’s US operating structure, would make it easier and less expensive to combine the two companies.


Now, the two chains have held unsuccessful talks in the past, and Zale’s CEO Betsy Burton has said there are significant logistical hurdles to a merger, although “the synergies would be huge.” 


I am not sure. A merger may be good for the stockholders – which is probably all Breeden cares about – but will it be good for the long-term health of either chain or this industry? One of the apparent difficulties of forcing change at Zale is its sheer size. The people at Sterling are smart, but fixing Zale would be a lot on their plate. We could be risking the health of one well-run chain by combining it with a less-well-run one. (And let’s not forget, Zale’s acquisition of Piercing Pagoda is the cause of at least some of its current woes.)   


Finally, one of the biggest problems in this industry is the sameness of product at mall-based stores. Merging Zale and Sterling certainly won’t help that.

JCK News Director