Published: Sun, May 14, 2017
Money | By Armando Alvarado

Coach is buying Kate Spade for $2.4 billion

American handbag maker Coach has agreed to acquire its rival fashion design house, Kate Spade & Company for $2.4bn to create a major New York-based luxury lifestyle firm.

The $18.50 per share cash offer represents a premium of 9 percent to Kate Spade's closing price on Friday.

Coach CFO Kevin Wills said he expects to realize a run rate of about $50 million within three years of the deal's closing.

"While M&A is not often seen positively by equity markets in luxury, we believe that for Coach it is different, essentially because acquisitions would dilute the mono-brand risk (an issue for any "soft luxury" company) and would lower the dependency on Coach brand outlets (the main bear argument on the name, still)".

Coach said it had identified global expansion opportunity through opening Kate Spade specialty stores.

But the union between the two NY retailers creates a luxury accessories powerhouse that also includes women's luxury footwear company, Stuart Weitzman. Unlike Coach and Michael Kors, which have been known for their loud logos and were slow to adapt to this small logo trend, Kate Spade bags include a tiny stamp with its brand name. Additionally, in February, Kate Spade confirmed it was considering "strategic alternatives" for the company's future.

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Coach expects the deal to close by the end of the third quarter of 2017. In January 2015, Coach spent $574 million to buy designer footwear maker Stuart Weitzman. These cost synergies will be realised through operational efficiencies, improved scale and inventory management, and the optimisation of Kate Spade's supply chain network, he says.

About 60 percent of Kate Spade's customers are millennials, Coach said.

The deal is expected to close in early July 2017 - or Q3 - and the acquisition is expected to be accretive to earnings per share in fiscal 2018 on a non-GAAP basis.

Coach will pay $ 18.50 per share in cash, for a total value of $ 2.4 billion, reports CNN. Coach last week reported its fourth straight quarter of rising comparable sales in its biggest market.

But sales per square foot at stores open at least a year fell 2.4% in the 12-month period ending October 1, underscoring the retailer's challenges, including a sluggish luxury market, lower growth in China and unfavorable currency rates.

After the acquisition, Kate Spade will enjoy its position in the market as an independent brand. Coach handbags above the $400 price level now account for 55 percent of the category's sales in North America, up from 40 percent past year.

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