Tapestry and Capri: Acquisition Is a Fine Deal, but There Are Risks

We view Tapestry’s TPR acquisition of Capri Holdings CPRI as excellent for Capri’s shareholders, since the deal price of $57 per share provides more than 50% upside from recent levels and is less than 10% shy of our $62 fair value estimate for its stock. We also think the deal makes strategic sense for Capri, as we do not believe it has a long-term competitive edge as a standalone company (hence its no-moat rating). Thus, as we expect the deal will close at the offered price, we intend to lower our fair value estimate for Capri to $57 per share.

We also think the acquisition is good for narrow-moat Tapestry. The $8.5 billion cost ($6.8 billion in equity and $1.7 billion in assumed debt) is large compared with Tapestry’s enterprise value of about $12 billion, and the deal will be financed with existing capital sources and $8 billion in new bridge debt. Thus it will bring additional interest expense and balance sheet risk.

However, according to the company, the deal will also bring about $200 million in annual cost savings within about three years, related to supply chain and headcount efficiencies. Given this benefit, and since Tapestry is buying Capri at an attractive price in relation to our pre-offer fair value estimate for its stock, we expect to lift our fair value estimate for Tapestry by 5%, from $57 to $60, leaving its shares very undervalued.

Tapestry has yet to report its fiscal 2023 fourth-quarter results, but the company has indicated that earnings will be in line with previous guidance (our forecast is for 2% sales growth and earnings per share of $0.97). Capri’s first-quarter fiscal 2024 results are expected to be slightly above its prior outlook, which implied lower first-half sales and EPS.