With the Zale deal for Apollo looking abandoned — though at least one vendor I talked to thinks it could still happen — I have a couple of thoughts:

-         According to reports, Apollo Capital Management wanted to invest money and bring back many “old faces” to the company, including former chairman Robert DiNicola and Zales division president  Pam Romano. There was a certain logic to this: At this point, Zale is probably going to go with a CEO with jewelry experience, after the experience of its last two non-jewelry CEOs. But, there aren’t that many people in the industry qualified to be CEO of Zale, certainly not with unblemished records, unless Zale is looking to poach someone possibly from Sterling.  So bringing back the old guard may have been – and may still be – the safest bet for a seriously injured company that can’t afford to take any more big risks.

-         The industry actually seemed a lot more skeptical about Apollo, since the affiliated Apollo Real Estate Advisors was involved in NRDC’s ill-fated acquisition of Fortunoff.

-         The Dallas Morning News says Zale has a “dozen” possible suitors. Bloomberg says TPG and Sun Capital are in the running (and doesn’t mention Apollo). Generally, this industry is not too happy when hedge funds get involved in retail, given their dismal track record, but there doesn’t seem to be many other entities that can step in at this point.  Anyway, if another investor comes in, the next question is: Do they install their own hand-picked management team? In a way, there is a bit of Catch-22 here: The gaps in Zale’s management team are probably deterring investors. But many top CEOs could have reservations about joining a company that has liquidity problems when it’s not even clear about who is going to own it.

-         There is an interesting interview here with Michael Ohara of Consensus Advisors where he says that he doesn’t see Zale liquidating. Neither do I. From talking to vendors, most are being taken care of, and still on board with the company. By contrast, with Friedman’s, Finlay and Whitehall, there was a palpable sense in the industry they were goners. Ohara notes that a pre-packaged Chapter 11 might be the best way to solve Zale’s problems, but doesn’t see that happening, and most think that’s because of the Breeden factor. (The company’s CFO says a filing “has never been contemplated” here.)  Personally, I find it disconcerting that Breeden still has say over the company. He previously ran the SEC. Now he wants to run a retail jewelry chain. I’m not sure why he feels those skills are transferrable.

-         Most feel that as a retail entity, Zale is “fixable,” with the right management and strategy.  The name is as well-known as any in the industry, the economy seems to be improving, and, as we all know, the jewelry space has gotten a lot less competitive over the last two years. But it doesn’t have unlimited time to right its wrongs, and the idea of it taking on more debt is worrisome.

-         For a more negative view, here is Nick White’s latest.

Rob Bates

JCK News Director