Two of the country’s best-known luxury accessories brand plan to merge. Coach Inc. (NYSE: COH) has agreed to purchase Kate Spade & Co. (NYSE: KATE) in an all-cash transaction valued at $2.4 billion ($18.50 per share). The purchase price represents a 9% premium to Kate Spade’s Friday closing price of $16.97 and a 28% premium to the company’s closing price on December 27, the last trading day preceding a report that the two were in discussions.
Activist investor Caerus Investors sent a letter to Kate Spade in mid-November urging the company to sell itself, noting that the company traded at a discount to peers but that it had a solid market opportunity if the firm could shed its low-growth valuation.
The transaction is not subject to financing conditions and Coach has secured committed financing for the deal from BofA/Merrill Lynch. According to the announcement, the 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, a portion of which will be used to repay an expected $800 million 6-month term loan. The deal is expected to close in the third quarter, subject to usual conditions and acceptance of a tender offer by a majority of Kate Spade shareholders.
Coach CEO Victor Luis said:
[W]e believe Coach’s extensive experience in opening and operating specialty retail stores globally, and brand building in international markets, can 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.
Craig A. Leavitt, Kate Spade’s CEO, agreed:
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.
In what has become an unforgiving climate for retail companies with the decline of traffic to stores, this deal makes a lot of sense. Coach CFO Kevin Wills said he expects to realize a run rate of about $50 million within three years of the deal’s closing. Coach expects to follow the same playbook it used to recover its own footing: reducing Kate Spade’s “wholesale disposition and online flash sales channels.”
Kate Spade’s stock traded up 8.4% in Monday’s premarket at $18.40 in a 52-week range of $14.02 to $24.24
Coach shares traded up more than 3% at $44.00, above the 52-week range of $34.07 to $43.83.