Coach bags Kate Spade in US$2.4 billion deal

Luxury brand hopes takeover of high-profile fashion house will help fuel growth

PUBLISHED : Monday, 08 May, 2017, 11:04pm
UPDATED : Monday, 08 May, 2017, 11:04pm

Coach has agreed to buy handbag maker Kate Spade for US$2.4 billion following months of talks, helping the luxury brand cope with an industry racked by deep discounting and sluggish demand.

The US$18.50-a-share transaction represents a premium to Kate Spade’s price when deal speculation first surfaced in December last year, but it is well below the amount investors were betting on in more recent months.

The long-anticipated deal brings a high-profile brand to Coach 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 has led Coach and others to focus more on its own specialty stores, an area where it hopes to use Kate Spade 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,” said Victor Luis, the chief executive of Coach.

The takeover price is 27.5 per cent above Kate Spade’s close on December 27, the day that reports about a possible sale first appeared. As deal speculation raged in February, the shares climbed above US$24, a sign investors expected to get a much richer price than they ultimately received.

Kate Spade shares climbed as much as 8.4 per cent to US$18.40 in New York yesterday, 10 US cents below the offer price. The stock had slid 30 per cent in the past year to last Friday’s close. Coach jumped as much as 9.1 per cent to US$46.56.

The price was 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.”

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 needed better management to help boost its profit margins.

Coach plans to finance the deal, which it expects will close in the third quarter, with senior notes, bank term loans and about US$1.2 billion of cash, according to the statement.

Coach chief financial officer Kevin Wills said the complementary nature of the businesses should bring US$50 million in cost savings in three years after the deal closed. The idea is to improve scale and inventory management, as well as streamline Kate Spade’s supply chain.

The acquisition would add to earnings from fiscal 2018, and lead to “double-digit accretion” by the following year, Coach said.

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 autumn last year, he has been saying Coach is on the lookout for “great brands”, and media reports had mentioned British fashion house Burberry Group and high-end shoemaker Jimmy Choo, in addition to Kate Spade, as potential targets.

The company had no other big acquisitions in the short term, Luis said on a conference call yesterday after the deal was announced. He did say Coach may look to buy smaller companies, as it did with its US$574 million purchase of shoemaker Stuart Weitzman in 2015.

Noel Hebert, a credit analyst at Bloomberg Intelligence, said British 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 utilise non-US cash, though with an apparel tilt”, he said.

If Kate Spade chief executive Craig Leavitt is terminated after the deal goes through, he will receive about US$6.79 million in severance and benefits, and equity awards worth at least US$12.3 million that will vest early, valued at the purchase price. Leavitt joined the company in 2008 as chief operating officer and co-president, and has served as chief executive for the past three years.