Coach parent Tapestry to acquire Michael Kors parent Capri in cash deal valued at $8.5 billion

By Ciara Linnane

Tapestry is betting it can succeed in turning around Michael Kors, which Capri has been working to reposition as a high-end brand

Fashion company Tapestry Inc., parent to the Coach and Kate Spade brands, said Thursday it has reached an agreement to acquire Capri Holdings Ltd., the parent company of Michael Kors, Jimmy Choo and Versace, in an all-cash deal valued at $8.5 billion.

The deal, which is one of the largest fashion-industry acquisitions in recent years, was first reported by the Wall Street Journal late Wednesday

Under the terms of the deal which has been approved by both boards, Tapestry will pay $57 per Capri share (CPRI), equal to a premium of about 59% over the 30-day volume weighted average price through Wednesday's close.

The deal is expected to immediately boost Tapestry's (TPR) adjusted per-share earnings and generate significant cash flow. The company expects to realize more than $200 million in run-rate cost synergies within three years of closing. The companies had combined revenue of more than $12 billion in the prior fiscal year and almost $2 billion in adjusted operating profit.

"The combination of Coach, Kate Spade, and Stuart Weitzman together with Versace, Jimmy Choo, and Michael Kors creates a new powerful global luxury house, unlocking a unique opportunity to drive enhanced value for our consumers, employees, communities, and shareholders around the world," Tapestry CEO Joanne Crevoiserat said in a statement.

The deal is expected to close in calendar year 2024.

Jefferies analysts said they view the deal as positive for Capri, "but are surprised Tapestry would want to acquire the company given existing brand similarities, momentum with current strategy, and potential execution issues,."

"With that said, double-digit accretion is compelling," they wrote in a note to clients. Jefferies has a hold rating on Capri.

TD Cowen analysts took a more upbeat view, describing the deal as a compelling combination.

"We believe Tapestry has prior turnaround capabilities, a leading customer data platform, China momentum, and can add greater cultural relevance and brand heat to Michael Kors," analysts led by Oliver Chen wrote in a note.

The deal will also drive scale as the combined company will own 6% of the $200 billion global luxury apparel and accessories market, said Chen. Approval is likely, he wrote, given the fragmentation in the market in light of the scale of other major luxury players.

TD Cowen has an outperform rating on Tapestry, or the equivalent of buy. It has a market perform rating on Capri, the equivalent of neutral.

In May, Capri swung to a loss in its fiscal fourth quarter as revenue slid more than 10%. The stock is down nearly 40% year to date, while the S&P 500 SPX has gained 16%.

The company was hit by weakness in the wholesale channel -- sales to department stores -- for a second straight quarter.

At Michael Kors, wholesale orders were down in the double digits in the back half of the year, CEO John Idol told analysts on the earnings call.

Capri has been elevating that brand and positioning its bags and accessories as more high-end products, removing them from stores that were discounting heavily. But consumers facing inflationary pressures for other items have remained cautious and in the case of shoppers at department stores, are balking at high prices.

Tapestry reported fiscal third-quarter earnings in May that beat estimates, and the company raised its full-year guidance. Its shares are up 8% year to date.

Read also: Coach parent company Tapestry and Ralph Lauren both see growth from Gen Z, millennials

Tapestry said its board has approved a 17% increase in its quarterly dividend to $1.40 a share. And the company has $8 billion in fully committed bridge financing from Bank of America N.A. and Morgan Stanley Senior Funding, Inc.

It said it expects to fund the deal via a mix of senior notes, term loans and excess cash, part of which will be used to pay certain of Capri's existing outstanding debt.

Tapestry has engaged with the ratings agencies and is determined to maintain its investment-grade rating. The company said it will suspend its share buyback activity to give it leeway to prioritize de-leveraging via debt reduction and expects to achieve a leverage ratio of 2.5 times debt/EBITDA within 24 months after close.

TD Cowen said it is not expecting any other bidders to emerge, given the need for a turnaround of the Capri business.

"European luxury players also generally prefer 100+ heritage brands and no outlet exposure," Chen wrote. "We believe in Tapestry's ability to turn around the Kors brand, as Tapestry has demonstrated with the impressive execution of the Coach. TPR has revived Coach to become an iconic, authentic, and expressive brand that controls distribution as direct-to-consumer represents 90% of sales."

Capri shares soared 58% on the news, while Tapestry fell 12%.

-Ciara Linnane

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

08-10-23 1056ET

Copyright (c) 2023 Dow Jones & Company, Inc.