(Bloomberg)—Coach Inc. agreed to buy handbag maker Kate Spade & Co. for $2.4 billion following months of talks, helping the luxury brand cope with an industry racked by deep discounting and sluggish demand.
The $18.50-a-share transaction represents a premium to Kate Spade’s price when deal speculation first surfaced in December, but it’s well below the amount investors were betting on in more recent months.
The long-anticipated deal brings a high-profile brand to Coach, No. 168 in the newly released Internet Retailer 2017 Top 500, and may help remedy the handbag industry’s broader woes. The companies have struggled to get customers to pay full price, and a reliance on the beleaguered department-store channel has hurt sales. That’s led Coach and others to focus more on its own specialty stores, an area where it hopes to use Kate Spade (No. 124) to fuel growth.
“Coach’s extensive experience in opening and operating specialty retail stores globally, and brand building in international markets, can unlock Kate Spade’s largely untapped global growth potential,” Victor Luis, CEO of Coach, said in a statement.
The takeover price is 27.5% above Kate Spade’s closing price on Dec. 27, the day that reports about a possible sale first appeared. As deal speculation raged in February, the shares climbed above $24, a sign investors expected to get a much richer price than they ultimately received.
Kate Spade shares climbed as much as 8.4% to $18.40 in New York trading Monday, 10 cents below the offer price. The stock had slid 30% in the past year through Friday’s close. Coach jumped as much as 9.1% to $46.56.
The price is the reflection of a challenging retail industry, said Chen Grazutis, an analyst at Bloomberg Intelligence. “It isn’t as robust as we thought it would be at the beginning,” he said. “It doesn’t bode well for other brands’ valuation.”
Activist investor
Kate Spade investor Caerus Investors had pushed the fashion house to put itself up for sale. The investment firm said that while the company was generating solid growth, it needs better management to help boost its profit margins.
Perella Weinberg Partners LP advised Kate Spade, while Evercore Group LLC acted for Coach. Coach plans to finance the deal, which it expects will close in the third quarter, with senior notes, bank term loans and about $1.2 billion of cash, according to the statement.
Coach chief financial officer Kevin Wills said the complementary nature of the businesses should bring $50 million in cost savings in three years after the deal closes. The idea is to improve scale and inventory management, as well as streamline Kate Spade’s supply chain.
The acquisition will add to earnings from fiscal 2018, and lead to “double-digit accretion” by the following year, Coach said.
More acquisitions?
Luis, who has been at the helm of Coach since January 2014, has made no secret of his interest in turning the company into a multibrand operation. Since last fall, he’s been saying Coach is on the lookout for “great brands,” and media reports had mentioned British fashion house Burberry Group Plc and high-end shoemaker Jimmy Choo Plc, in addition to Kate Spade, as potential targets.
The company has no other big acquisitions in the short-term pipeline, Luis said on a conference call Monday after the deal was announced. He did say Coach may look to buy smaller companies, as it did with its $574 million purchase of shoemaker Stuart Weitzman in 2015.
Noel Hebert, a credit analyst at Bloomberg Intelligence, said U.K. clothing retailer Ted Baker “fills a few strategic buckets” for Coach, because of its growth potential and European focus. The publicly traded company “would give Coach the ability to utilize non-U.S. cash, though with an apparel tilt,” he said.
If Kate Spade CEO Craig Leavitt is terminated after the deal goes through, he’ll receive about $6.79 million in severance and benefits, and equity awards worth at least $12.3 million that’ll vest early, valued at the purchase price. Leavitt joined the company in 2008 as chief operating officer and co-president, and has served as CEO for the past three years.
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