Speculation has swirled for some time about Kate Spade (KATE 18.41, +1.44, +8.5%) being an acquisition target. That speculation picked up last December and it revved up in February this year after Kate Spade said it would be reviewing strategic alternatives to further enhance shareholder value.
Today, some closure has been provided after Coach (COH 43.37, +0.71, +1.7%) announced it will acquire Kate Spade for $2.4 billion or $18.50 per share in cash.
That offer price is a 27.5% premium over where shares of KATE were trading prior to media speculation in late December of a possible sale. Shares of KATE, however, traded just north of $24.00 earlier this year on the back of the takeover speculation, so the deal price itself will have the semblance of being a takeunder for some holders of the stock.
The latter point notwithstanding, today's news appears to close the book on the takeover speculation. One gets that sense seeing that KATE isn't trading above the cash offer price, which suggests the market isn't expecting a white knight here with a higher offer price.
Michael Kors (KORS 38.10) has always been rumored to be interested in the Kate Spade brand, yet it has remained silent in terms of any actual buyout offers.
Coach anticipates the deal will close in the third quarter of calendar 2017 and that it will be accretive to fiscal 2018 non-GAAP earnings, followed by double-digit accretion by fiscal 2019.
There is certainly some complementary overlap in the businesses, so Coach should have some success in cutting costs and improving supply-chain efficiency. At the same time, there is some nice expansion potential via increased international exposure for the Kate Spade brand, which derived just over 80% of its sales over the last twelve months from the U.S. versus 55% for Coach.
It is Coach's belief that it can achieve a run rate of approximately $50 million in synergies within three years of closing the deal.
Coach said it plans to reduce sales in Kate Spade's wholesale business and its online flash sales channels as part of its effort to bolster the health of the Kate Spade brand. In other words, Coach's aim is to restore some premium cachet to the Kate Spade brand in much the same way it has with its own brand.
Thus far, Coach investors seem to like the merits of this transaction. Shares of COH, which are up 21.8% year-to-date, are trading 1.7% higher in pre-market action.