20. Acquisitions

Botswana diamond polishing factory

On November 4, 2013, Signet acquired a diamond polishing factory in Gaborone, Botswana for $9.1 million. The acquisition expands the Company’s long-term diamond sourcing capabilities and provides resources for the Company to cut and polish stones.

The transaction was accounted for as a business combination during the fourth quarter of Fiscal 2014. During the second quarter of Fiscal 2015, the Company finalized the valuation of net assets acquired. There were no material changes to the valuation of net assets acquired from the initial allocation reported during the fourth quarter of Fiscal 2014. The total consideration paid by the Company was funded through existing cash and allocated to the net assets acquired based on the final fair values as follows: property, plant and equipment acquired of $5.5 million and goodwill of $3.6 million. See Note 10 for additional information related to goodwill. None of the goodwill will be deductible for income tax purposes.

The results of operations related to the acquired diamond polishing factory are reported within the Other reportable segment of Signet’s consolidated results and included in Signet’s condensed consolidated financial statements commencing on the date of acquisition in the Other reportable segment.

Zale Corporation

On May 29, 2014, the Company acquired 100% of the outstanding shares of Zale Corporation and Zale Corporation became a wholly-owned consolidated subsidiary of Signet. The Acquisition aligns with the Company’s strategy to diversify businesses and expand its footprint.

Under the terms of the Agreement and Plan of Merger, Zale Corporation shareholders received $21 per share in cash for each outstanding share of common stock and the vesting, upon consummation of the Acquisition, of certain outstanding Zale Corporation restricted stock units and stock options, which converted into the right to receive the merger consideration. The consideration transferred in conjunction with the Acquisition was $1,458.0 million, including $478.2 million to extinguish Zale Corporation’s existing debt. See Note 17 for additional information regarding litigation related to the acquisition of Zale Corporation. The Acquisition was funded by the Company through existing cash and the issuance of $1,400 million of long-term debt, including: (a) $400 million of senior unsecured notes due in 2024, (b) $600 million of two-year revolving asset-backed variable funding notes, and (c) a $400 million five-year senior unsecured term loan facility. See Note 19 for additional information related to the Company’s long-term debt instruments.

The transaction was accounted for as a business combination during the second quarter of Fiscal 2015. The following table summarizes the consideration transferred in conjunction with the Acquisition.

Calculation of consideration


(in millions except per share amounts)	Amount
Cash consideration paid to Zale Corporation shareholders ($21 per share)	$	910.2
Cash consideration paid for settlement of Zale Corporation stock options, restricted share awards and long term incentive plan awards		69.6
Cash paid to extinguish Zale Corporation outstanding debt as of May 29, 2014		478.2

Total consideration transferred	$	1,458.0

Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed are recorded at acquisition date fair values. The following table summarizes the preliminary fair values identified for the assets acquired and liabilities assumed in the Acquisition as of May 29, 2014:


(in millions)	Initial fair values			Revised fair values			Variance
Cash and cash equivalents	$	28.8		$	28.8		$	—
Inventories		855.6			862.4			6.8
Other current assets		22.5			22.7			0.2
Property, plant and equipment		104.2			99.6			(4.6	)
Intangible assets:
Trade names		420.0			420.0			—
Favorable leases		50.2			50.2			—
Deferred tax assets		126.3			129.8			3.5
Other assets		25.4			25.4			—
Current liabilities⁽¹⁾		(202.8	)		(203.4	)		(0.6	)
Deferred revenue		(93.0	)		(93.3	)		(0.3	)
Unfavorable leases		(50.5	)		(50.5	)		—
Unfavorable contracts		(65.6	)		(65.6	)		—
Deferred tax liabilities		(263.6	)		(241.0	)		22.6
Other liabilities		(24.6	)		(24.6	)		—

Fair value of net assets acquired		932.9			960.5			27.6
Goodwill		525.1			497.5			(27.6	)

Total consideration transferred	$	1,458.0		$	1,458.0		$	—

(1)	Includes loans and overdrafts, accounts payable, income taxes payable, accrued expenses and other current liabilities.

During the third quarter of Fiscal 2015, the Company made certain adjustments to the identifiable assets acquired and liabilities assumed to more accurately reflect the fair value. The fair value of the net deferred tax liabilities acquired decreased by $26.1 million in conjunction with the finalization of the acquired entity’s tax return. The net impact of all adjustments identified during the third quarter of Fiscal 2015 to the preliminary fair value of net assets acquired was a $27.6 million increase in net assets with a corresponding decrease in goodwill. There was no material impact on previously reported financial information as a result of these adjustments. As of November 1, 2014, the fair value of assets acquired and liabilities assumed is based upon a preliminary valuation. The estimates and assumptions utilized in the preliminary valuation are subject to change within the measurement period as additional information is obtained. The Company is in the process of finalizing the valuation of net assets acquired in the Acquisition, most notably, the valuation of inventory, intangible assets, leases and income taxes. The valuation is expected to be finalized within the measurement period, which will not exceed one year from the acquisition date.

The excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed was recognized as goodwill. As a result of the valuation of assets acquired and liabilities assumed being preliminary as of November 1, 2014, the Company has not allocated goodwill attributable to the Acquisition to its reporting units. See Note 10 for additional information regarding goodwill. The goodwill attributable to the Acquisition will not be deductible for tax purposes. Since the date of acquisition, the operating results for the acquired business were as follows:


(in millions)	13 weeks ended November 1, 2014			39 weeks ended November 1, 2014
Sales	$	331.4		$	578.9
Operating loss		(34.5	)		(44.3	)
Net loss		(22.6	)		(29.6	)

The following unaudited consolidated pro forma information summarizes the results of operations for the 13 and 39 weeks ended November 1, 2014 and November 2, 2013, as if the Acquisition and related issuance of $1,400 million of long-term debt (see Note 19) had occurred as of February 2, 2013. The unaudited consolidated pro forma financial information was prepared in accordance with the acquisition method of accounting under existing standards and is not necessarily indicative of the results of operations that would have occurred if the Acquisition had been completed on the date indicated, nor is it indicative of the future operating results of the Company.

Pro forma - unaudited

13 weeks ended

39 weeks ended

(in millions, except per share amounts)

November 1,
2014

November 2,
2013

November 1,
2014

November 2,
2013

Pro forma sales

1,183.8

1,124.1

4,043.8

3,832.8

Pro forma net income

15.0

3.8

213.6

149.5

Pro forma earnings per share – basic

0.19

0.05

2.67

1.86

Pro forma earnings per share – diluted

0.19

0.05

2.66

1.85

The unaudited pro forma information gives effect to actual operating results prior to the Acquisition and has been adjusted with respect to certain aspects of the Acquisition to reflect the following:

•

Acquisition accounting adjustments to reset deferred revenue associated with extended service plans sold by Zale Corporation prior to the Acquisition to fair value as of the acquisition date. The fair value of deferred revenue is determined based on the estimated costs remaining to be incurred for future obligations associated with the outstanding plans at the time of the Acquisition, plus a reasonable profit margin on the estimated costs. Adjustment also reflects the impact of deferring the revenue associated with the lifetime extended service plans over a 10-year period as disclosed in Note 1.

•

Additional depreciation and amortization expenses that would have been recognized assuming fair value adjustments to the existing Zale Corporation assets acquired and liabilities assumed, including inventory, intangible assets, favorable and unfavorable leases, and unfavorable contracts.

•

Tax impact of the Company’s amended capital structure as a result of the Acquisition and related issuance of $1,400 million of long-term debt.

•

Adjustment of valuation allowances associated with U.S. and Canadian deferred tax assets, including net operating loss carryforwards.

•

Exclusion of acquisition-related costs of $9.4 million and $48.6, which were included in the Company’s results of operations for the 13 and 39 weeks ended November 1, 2014, respectively. Also excluded were costs associated with the unsecured bridge facility discussed in Note 19 of $4.0 million, which were expensed during the 39 weeks ended November 1, 2014. All amounts were reported within the Other segment.

The unaudited pro forma results do not reflect future events that either have occurred or may occur after the Acquisition, including, but not limited to, the anticipated realization of expected operating synergies in subsequent periods. They also do not give effect to acquisition-related costs that the Company expects to incur in connection with the Acquisition, including, but not limited to, additional professional fees, employee integration, retention and severance costs.