Acquisition of Michael Kors by Coach’s Parent Company Forms US Powerhouse for Competition Against European Luxury Competitors

On August 10th, Coach parent company Tapestry (TPR.N) announced its acquisition of Capri Holdings (CPRI.N), the owner of Michael Kors, in a deal valued at $8.5 billion. This move aims to establish a robust U.S. fashion entity capable of competing against larger European counterparts for a more significant stake in the global luxury market.

Historically, American luxury brands have faced challenges in matching the scale of their European counterparts, which has limited their ability to compete effectively. LVMH (LVMH.PA), a Paris-listed conglomerate, boasts ownership of 75 brands, including esteemed names like Tiffany, Louis Vuitton, and Dior.

This merger, occurring on Thursday, will bring together Tapestry’s more accessible luxury brands like Kate Spade and Stuart Weitzman, along with Capri’s prestigious labels, Jimmy Choo and Versace.

Analyst Jelena Sokolova from Morningstar noted, “Scale is becoming increasingly vital in the luxury sector due to the substantial resources that conglomerates can allocate to bolstering their smaller brands.”

The combined entity reported generating over $12 billion in global annual sales during the previous fiscal year, according to Tapestry. To provide context, LVMH recorded approximately $87 billion in sales the prior year, while another European competitor, Kering (PRTP.PA), achieved around $23 billion.

As part of the deal, Tapestry will pay Capri shareholders $57 per share in cash, which represents a premium of nearly 65%. The calculated equity value of the agreement stands at $6.69 billion, as per Reuters’ estimations.

During the trading session, Capri’s shares surged to a six-month high of $54.52, ultimately closing with a 56% gain at $53.90. Meanwhile, Tapestry experienced a 16% decrease, closing at $34.67, as investors expressed concerns over the company’s $8 billion bridge loan taken to facilitate the acquisition.

This strategic merger also serves as a defensive measure against a projected decline in luxury goods demand in the U.S. due to persistent inflation, which is compelling consumers to reduce discretionary spending. Neil Saunders, Managing Director at Global Data, emphasized, “Both Tapestry and Capri are now eyeing international markets to drive growth. Operating as a larger entity provides a sense of security for ambitious international endeavors.”

Analysts believe the acquisition will revitalize Capri’s Michael Kors brand under the more effective management of Tapestry, following weak sales in recent quarters.

Both Tapestry and Capri have expanded through acquisitions in the past. In 2017, Tapestry (then known as Coach) purchased Kate Spade for $2.4 billion, while Capri (formerly Michael Kors) acquired Jimmy Choo for $1.2 billion in the same year. Capri later acquired Versace for $2.2 billion in 2018.

Joanne Crevoiserat, CEO of Tapestry, expressed the strategic vision behind the deal, saying, “We’re broadening and diversifying our customer base…deepening our access to luxury consumers and market segments.”

This acquisition of Capri might signal a resurgence of deal-making in the U.S. luxury sector, contrasting with European majors that have been acquiring high-end brands. Recently, Kering, the owner of Gucci, announced its purchase of a 30% stake in Italian label Valentino, while LVMH completed its $15.8 billion acquisition of Tiffany in early 2021.

Expected to contribute immediately to Tapestry’s adjusted profit, the acquisition is anticipated to finalize in 2024. The companies anticipate generating savings exceeding $200 million within three years of the deal’s closure.

Separately, Capri reported a 9.6% decline in first-quarter total revenue to $1.23 billion on the same day. However, this figure exceeded analysts’ projections of $1.20 billion according to Refinitiv IBES data. The company’s adjusted profit reached 74 cents per share, surpassing estimates of 71 cents. Given the announcement of the deal, Capri indicated it would not provide financial guidance at the moment and withdrew its previous forecast.