Calling it the right deal at the wrong price, TIG Advisors is calling for shareholders to oppose Signet Jewelers' (SIG 1.38%) acquisition of Zale (NYSE: ZLC). The investor criticized the transaction for significantly tilting the field in favor of Signet shareholders at the expense of those who own Zale's stock, suggesting the former are receiving five times the value of the latter.

In February Signet moved to become an even larger presence in the jewelry industry, expanding its already dominant position from a 10% share of the U.S. market to one that would command a 15% share, making it three times as large as its nearest rival.

To achieve that size, Signet is willing to pay Zale investors $690 million, or $21 a share, a 41% premium to Zale's $14.91 closing price the day before the deal was announced. Together they will generate approximately $6 billion in sales annually, operate some 3,600 stores, and produce an estimated $745 million in earnings before interest, taxes, depreciation, and amortization. It's not that TIG Advisors doesn't think the combination of the two specialty jewelers is a good deal, it's just that Zale's management left a lot of money on the table for their shareholders. Well, all except Golden Gate Capital, which owns approximately 22% of the company.

TIG charges that back in November the hedge fund announced its intention to shed its interest in Zale, serving to deflate the stock's performance. Despite improving earnings, Zale has underperformed its peers by 17% between the two announcements. And by including Golden Gate's board representative on the merger committee, it created a conflict of interest. Where the board would normally look to maximize value, the hedge fund would be looking to protect its interests on the way out the door. Considering the size of Golden Gate's stocks holdings, TIG says the ballot box is already "stuffed" on the deal.

Worse, Bank of America was serving as underwriter for the tranche of shares Golden Gate was looking to unload, and represented Zale in the deal while also pursuing Signet to make the transaction. TIG wants to see the presentations made to both Zale and Signet by Bank of America, believing it didn't seek out the best deal.

Source: TIG Advisors investor presentation, May 9, 2014.

In all, the investor believes the merger grossly undervalues Zale, and notes the projections used to formulate a valuation were compiled last summer and are not based on current conditions, which are much improved. Indeed, Zale posted its first profit in five years at the end of 2013, suggesting the turnaround that's been in the works is finally gaining traction.

That lends some credence to TIG Advisors' argument that what may be a fair value for a broken company isn't the same for one that's now on the mend and should see significant earnings expansion over the next few years.

For its part, Zale says the price being paid is fair, particularly when compared to other recent acquisitions, as it either meets or significantly exceeds the value assigned to those targets. Golden Gate is a significant shareholder, that's true, but it wants to maximize the value of its holdings too, and its interests are aligned with those of other investors.

Source: Zale investor presentation, May 13, 2014.

With the shareholder meeting to vote on the merger set for May 29, TIG Advisors is aware investors may be worried about downside risk if the deal fails, so it's asking that if they don't want to vote against the merger to at least abstain or otherwise withhold their vote. According to the merger agreement, if a quorum can't be achieved, then the deal will be postponed, allowing further time to consider the terms of the transaction. In essence, TIG says, "Shareholders are essentially long a very valuable 'Put option.'"

What had seemed a smart and certain acquisition could be in doubt if TIG Advisors is correct about receiving a lot of encouragement from other shareholders. And what was once a diamond in the rough may turn into fool's gold if the deal isn't done.