Coach’s deal to buy Kate Spade is finally in the bag.
The retailer said on Monday it was buying Kate Spade (KATE) for $2.4 billion in cash, landing its biggest deal yet as it sets out to remake itself as a multi-brand company beyond its Coach namesake. The news confirms months of media reports that Coach (COH) was pursuing its smaller rival. Coach touted the deal as a tool to help it reach younger consumers.
Coach recently restructured its c-suite to reflect its new holding company strategy, among other things hiring a separate CEO for the Coach brand. The company’s first major acquisition of another company was its $574 million purchase of luxury shoe brand Stuart Weitzman two years ago.
The company’s argument for making purchases is that its global reach and strong management—widely recognized by the industry and Wall Street analysts alike—would optimize the performance of smaller brands while complementing Coach’s offerings.
The idea is also to shield Coach Inc from the ups and downs of its namesake brand, which only two years ago saw comparable sales fall more than 20% in North America. Long the U.S. handbag leader, Coach lost its top spot to Michael Kors (KORS) a few years ago.
“The combination enhances our position in the attractive global premium handbag and accessories, footwear and outerwear categories, bringing product, brand positioning and customer diversification to the portfolio,” said Coach Inc CEO Victor Luis in a statement.
Kate Spade, which soared during the recent handbag boom and last year had revenues of $1.38 billion, came under pressure from activist hedge fund Caerus Investors last autumn as its profit margins were well below those of its rivals, including Coach. Coach’s offer of $18.50 a share is about 27.5% above the Kate stock price before media speculation about a deal emerged and sent its stock upwards.
Coach, enjoying something of a comeback after years of aggressive discounting and expansion hurt its luxury aura in North America, said it would use some of the same tactics at Kate Spade as it did at Coach to fix the business. Those have included fewer sales events and the departure from many department stores like weak Macy’s locations, even if that hurts sales in the short term; the aim is to protect profit margins and stave off the cheapening of the brand. Coach last week reported its fourth straight quarter of rising comparable sales in its biggest market.
The company will finance the $2.4 billion Kate deal with $1.2 billion in cash (it had $1.9 billion as of the end of its most recent quarter) as well as senior notes and bank term loans.
Coach’s financial advisor was Evercore Group and its legal advisor is Fried, Frank, Harris, Shriver & Jacobson. Kate Spade’s financial advisor was Perella Weinberg and its legal advisor is Paul, Weiss, Rifkind, Wharton & Garrison.