Bloomberg

(Bloomberg) -- Coach Inc. investors think the luxury brand just found itself a bargain.

The company’s shareholders applauded its $2.4 billion acquisition of Kate Spade & Co., sending Coach on one of its biggest rallies in months. Kate Spade, a rival maker of handbags and other accessories, will fetch $18.50 a share as part of the deal -- a price that’s well below where its stock traded earlier this year.

The deal brings mixed messages to a retail industry that seems poised for more consolidation: Mergers may help companies cope with sluggish store traffic and steep discounting, but takeover targets are unlikely to get big-ticket prices.

“It doesn’t bode well for other brands’ valuation,” said Chen Grazutis, an analyst at Bloomberg Intelligence.

The long-anticipated deal brings a high-profile brand to Coach, a 76-year-old business that’s trying to appeal more to millennials. The merger also may help remedy the handbag industry’s broader woes. 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 the company 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 Chief Executive Officer Victor Luis, 50.

He also cited Kate Spade’s “very strong position amongst millennial consumers,” noting that they make up about 60 percent of its customer base.

High Hopes

The takeover price is 27.5 percent above Kate Spade’s closing price on Dec. 27, the day that reports about a possible sale first appeared. But the stock rose much higher in the interim. 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.

In the wake of the deal on Monday, Kate Spade shares climbed as much as 8.4 percent to $18.40, a dime below the offer price. The stock had slid 30 percent in the past year through Friday’s close.

Shares of Coach, meanwhile, jumped as much as 9.1 percent to $46.56, suggesting that its investors liked what they saw.

Activist Investor

Kate Spade shareholder Caerus Investors had pushed for a sale of the fashion house, which also offers housewares and clothing lines. The investment firm argued that while the company was generating solid growth, it needed better management to help boost its profit margins.

Caerus founder Ward Davis said in February that Kate Spade could be worth “in the high $20s or low $30s” per share, depending on the number of bidders. The investment firm declined to comment on Monday about the $18.50-a-share price.

Michael Kors Holdings Ltd., another upscale fashion brand, also expressed interest in Kate Spade, people familiar with the matter said earlier this year. But Kate Spade was unable to orchestrate a bidding war that could propel its price to the levels Caerus envisioned.

Perella Weinberg Partners LP advised Kate Spade on the transaction, while Evercore Group LLC assisted Coach.

Coach plans to finance the deal with senior notes, bank term loans and about $1.2 billion of cash, according to the statement. The New York-based company expects the purchase to be completed in the third quarter.

If Kate Spade CEO Craig Leavitt is let go after the deal goes through, he’ll receive about $6.79 million in severance and benefits, along with equity awards worth at least $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 CEO for the past three years.

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.” Media reports had mentioned British fashion house Burberry Group Plc and high-end shoemaker Jimmy Choo Plc as potential targets.

But the company has no other big acquisitions in the short-term pipeline, Luis said on a conference call Monday. Luis declined to comment on Jimmy Choo, but did say Coach may look to buy smaller companies, as it did with its $574 million purchase of shoe brand Stuart Weitzman in 2015.

Noel Hebert, a credit analyst at Bloomberg Intelligence, said U.K. clothing retailer Ted Baker Plc may be a possible target. It “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. It has a market valuation of about $1.5 billion.

But Coach also can’t lose sight of its main brand, which still has challenges, said Neil Saunders, managing director of GlobalData Retail.

“The main Coach brand, while in much better health, still needs much nurturing and care in a very tough environment,” he said.

(Updates with CEO’s age in seventh paragraph. A previous version of the story was corrected to fix the magnitude of Coach’s rally.)

--With assistance from Anders Melin and Dalia Fahmy

To contact the reporter on this story: Stephanie Wong in New York at swong139@bloomberg.net.

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Chris Reiter at creiter2@bloomberg.net, Lisa Wolfson

©2017 Bloomberg L.P.

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