Coach Owner’s Mega Michael Kors Deal Takes on European Luxury Titans

by / ⠀Featured News / August 10, 2023
Mega Michael Kors Deal
The global luxury market is about to witness a significant shift as Coach parent Tapestry sets its sights on acquiring Capri Holdings, the owner of Michael Kors. This $8.5 billion deal aims to create a formidable U.S. fashion powerhouse that can challenge the dominance of larger European rivals in the luxury market.

U.S. luxury firms struggle to compete on scale

The move comes as U.S. luxury firms, including Tapestry, have struggled to compete on the same scale as their European counterparts. The acquisition will combine Tapestry’s more affordable luxury brands, like Kate Spade and Stuart Weitzman, with Capri’s Jimmy Choo and Versace labels, consolidating their resources and expanding their reach.

The Importance of Scale in Luxury

In the luxury industry, scale plays a crucial role in the success of brands. Larger conglomerates like LVMH, which owns renowned brands such as Louis Vuitton and Dior, have the resources to invest in growing their smaller brands.
According to Morningstar analyst Jelena Sokolova, “Scale appears to be more and more important in luxury given the resources big conglomerates can put into growing their smaller brands.”
By combining Tapestry and Capri, the newly formed entity will have a better chance of competing with European giants like LVMH and Kering, which have annual sales of $87 billion and $23 billion, respectively.

The Power of Consolidation

In addition to leveling the playing field, Tapestry’s purchase of Capri expands both companies’ consumer bases and gives them access to untapped markets.
Tapestry’s chief executive officer, Joanne Crevoiserat, emphasized the significance of expanding their client base, saying, “We’re broadening and diversifying our customer base… that deepen our access to luxury consumers and market segments.”
Capri’s other labels, including Jimmy Choo and Versace, have had lackluster sales in recent quarters, and the agreement will also help revitalize those brands.

Both Tapestry and Capri have expanded through mergers and acquisitions in the past.

Once known as Coach, Tapestry purchased Kate Spade for $2.4 billion in 2017. Capri, then known as Michael Kors, paid $1.2 billion in the same year to acquire Jimmy Choo, a British shoemaker. After waiting a year, Capri finally bought Versace for $2.2 billion.
Both businesses have benefited from the smart acquisitions that have increased their product offerings and strengthened their positions in the market.

A Response to Weakening Demand

The acquisition of Capri by Tapestry is a strategic move to compete with European luxury giants and a response to the weakening demand for luxury goods in the U.S. The current economic climate, marked by sticky inflation and reduced discretionary spending, has pressured companies like Tapestry and Capri.
To mitigate the impact of the slowing demand, these companies are looking to international markets to bolster their growth. As GlobalData Managing Director Neil Saunders explains, “There is more security in embarking on bold international plans as a larger entity.”

Financial Details and Market Response

Capri stockholders would get $57 in cash from Tapestry for each share under the terms of the purchase, a premium of approximately 65%. The purchase is valued at $6.69 billion in equity.
The companies’ global yearly revenues exceeded $12 billion in the prior fiscal year, suggesting a substantial market effect. The announcement was met with a variety of reactions from the market.
In Thursday’s trading afternoon, Capri shares increased to $54.12, while Tapestry shares decreased by 14%.
Investors raised concerns over Tapestry’s proposed $8 billion bridging loan to finance the transaction.

The Future of Luxury Deals

The purchase of Capri by Tapestry may signal a return to activity in the U.S. luxury goods market. American luxury brands have fallen behind European giants like LVMH and Kering in terms of size because of the latter’s penchant for buying up upmarket rivals.

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However, this merger represents a sea change in the business climate, as American companies take aggressive steps to compete worldwide.

Earlier this year, LVMH finalized its $15.8 billion acquisition of Tiffany & Co., and only last month, Kering announced that it had acquired a 30% share in Italian fashion house Valentino.

Within three years of the deal’s conclusion in 2024, Michael Kors expects to reap over $200 million savings.

FAQ

1. What is the value of the Michael Kors deal?

The Michael Kors deal, in which Coach parent Tapestry will acquire Capri Holdings, is valued at $8.5 billion.

2. What brands will be consolidated under the deal?

The deal will combine Tapestry’s brands, including Kate Spade and Stuart Weitzman, with Capri’s Jimmy Choo and Versace labels.

3. Why is scale significant in the luxury industry?

Scale is crucial in the luxury industry because larger conglomerates have the resources to invest in growing their smaller brands and compete on a global scale.

4. What is the market response to the deal?

Capri’s shares rose after the announcement, while Tapestry’s shares fell as investors expressed concerns about the bridge loan for the deal.

5. When is the deal expected to close?

The Michael Kors deal is expected to close in 2024.

Ultimately, the Michael Kors acquisition between Tapestry and Capri Holdings is a significant merger in the high-end retail sector.

The newly created company plans to compete with larger European rivals and increase its part of the global luxury industry by pooling its resources and expanding its customer base. The merger is a strategic response to waning demand in the U.S. and the industry’s growing emphasis on size.

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Tapestry’s purchase of Capri may signal the potential resurgence of M&A activity in the U.S. luxury sector. The market will be watching to see how this merger will affect the luxury sector as the deal unfolds.

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