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Coach makes strides to multi-brand giant status with Kate Spade acquisition

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May 8, 2017
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Coach this Monday morning announced that it has signed a definitive agreement to acquire Kate Spade for $2.4 billion, marking a significant moment in the saga that involves Burberry, Michael Kors and Jimmy Choo.
 
The Kate Spade and Coach Boards of Directors unanimously approved the new deal, which is expected to close in the third quarter of 2017. As per the agreement, Kate Spade shareholders will receive $18.50 per share in cash. The $2.4 billion purchase price is expected to be funded by a combination of senior notes, bank term loans and approximately $1.2 billion of excess Coach cash.



Victor Luis, Chief Executive Officer of Coach, Inc. 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.”
 
Coach CFO Kevin Wills added that the company believes “that we can realize a run rate of approximately $50 million in synergies within three years of the deal closing.” The company, which also acquired Stuart Weitzman in 2015, plans to keep Kate Spade independent to ensure a smooth transition to new ownership.

Kate Spade, the New York City-based handbag and accessories company, was first rumored to be eyeing a sale in December 2016. The Wall Street Journal broke the news that the company was put under pressure by US hedge fund Caerus Investors to sell, and in February, the company gave in to the pressure and began exploring strategic alternatives. Caerus sent a letter to the Kate Spade board in November saying that it was frustrated by the company’s inability to achieve profit margins.

Coach and Michael Kors emerged as potential buyers of Kate Spade after the letter went public and began a bidding war for the accessories company. Reuters reported that Kate Spade “would offer Coach or Michael Kors greater pricing power with department stores, as well a younger clientele.” The news agency also commented that 
Coach was eyeing an acquisition as a way to turn around its business in the anemic handbag market.

Coach was interested in acquiring Burberry prior to showing interest in Kate Spade. The New York City-based company in October was only rumored to be in talks with Burberry for a merger or acquisition, but in December it was revealed the Burberry rejected multiple offers from Coach. The American company is also seen as the most likely buyer of Jimmy Choo, which was put up for sale with Belstaff and Bally by majority owner JAB Holding.

Appealing to Coach is also the Millennial allure of Kate Spade, whose subtle logos and quirky and colourful designs, including bags shaped like cats and cars are a hit with the younger generation. But the company, like other luxury handbag makers, has struggled to live up to market expectations amid fierce competition and a drop in traffic to department stores.

The deal between Coach and Kate Spade may be official but both companies are not in the clear just yet. Shareholder rights law firm Johnson & Weaver hours after the acquisition announcement launched an investigation into whether the Kate Spade board breached their fiduciary duties. The firm is investigating whether the board adequately pursued alternatives to the acquisition and if it found the best possible price for Kate Spade shares of common stock.
 
Johnson & Weaver is also asking Kate Spade shareholders to contact them if they believe the proposed buyout price is too low. The $18.50 share price is $7.50 less than Wall Street analysts priced the stock and also less the stock’s highest trading price in 2016, which was $24.24.
 
Kate Spade CEO Craig Leavitt said that the agreement maximizes the value for Kate Spade stockholders and positions the brand for long-term success. 

With additional reporting by Reuters

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