Kate Spade RTW Fall 2017

Coach Inc. didn’t overpay for Kate Spade & Co. after all.

Coach said Monday it has a definitive agreement to acquire its handbag rival Kate Spade for $18.50 a share, representing a 27.5 percent premium to the closing price of Kate Spade’s shares on Dec. 27, 2016. The deal value of the cash transaction is $2.4 billion. Both boards of Coach and Kate Spade has approved the transaction.

While a premium to the Dec. 27 share valuation, it’s far lower than the $24-to-$26-a share some financiers had speculated for a deal. Then earlier in the year, investors and speculators had bid the stock up, and both Coach and Kate Spade took a breather from talks while the Kate Spade’s stock price re-adjusted itself. Last week, shares of Kate Spade ended the trading week at $16.97 a share as rumblings began surfacing that Kate Spade’s chief executive was seen at Coach’s offices.

Coach said the combined firm will create a leading luxury lifestyle company with a more diverse multi-brand portfolio. Coach also said it is “focused on preserving Kate Spade’s brand independence, as well as retaining key talent, ensuring a smooth transition to Coach Inc.’s ownership.”

The $2.4 billion deal will be funded by a combination of senior notes, bank term loans and $1.2 billion of excess cash, a portion of which will be used to repay an expected $800 million 6-month term loan. Coach said is has secured committed bridge financing from Bank of America Merrill Lynch.  The transaction is expected to close in the third quarter of calendar 2017.

Shares of Kate Spade rose 8.5 percent to $18.41 in pre-market trading, while Coach shares rose 1.2 percent to $43.37.

Victor Luis, chief executive officer of Coach, said, “Kate Spade has a truly unique and differentiated brand positioning with a broad lifestyle assortment and strong awareness among consumers, especially millennials. Through this acquisition, we will create the first New York-based house of modern luxury lifestyle brands, defined by authentic, distinctive products and fashion innovation.”

Luis added that Coach’s extensive experience in opening and operating specialty retail stores globally can help to unlock Kate Spade’s largely untapped global growth potential. “We are confident that this combination will strengthen our overall platform and provide an additional vehicle for driving long-term, sustainable growth.”

He also said that the planned acquisition is an important step in Coach’s evolution as a “customer-focused, multi-brand organization.”

Craig A. Leavitt, chief executive officer of Kate Spade, said, “Following a thorough review of strategic alternatives, reaching an agreement to join Coach’s portfolio of global brands will maximize value for our shareholders and positions Kate Spade for long-term success as we continue our evolution into a powerful, global, multi-channel lifestyle brand.”

Coach’s chief financial officer, Kevin Wills, said that due to the complementary nature of the two businesses, Coach believes it can realize a run rate of $50 million in synergies within three years of the closing of the deal. The cost synergies will be realized through operational efficiencies, improved scale and inventory management and the optimization of Kate Spade’s supply chain network.”

He added that Coach plans to reduce sales in Kate Spade’s wholesale business and online flash sales channels – steps Coach has taken for its own core brand – and have the acquisition be accretive in fiscal 2018 on a non-GAAP basis, and reach double-digit accretion by fiscal 2019, also on a non-GAAP basis.


For more on Coach, Kate Spade:

Coach’s Growing Millennial Focus Makes Kate Spade the Better M&A Play


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