LONDON, UK / ACCESSWIRE / May 9, 2017 / Active Wall St. blog coverage looks at the headline from New York based retailer of luxury accessories Coach, Inc. (NYSE: COH) and Kate Spade & Co. (NYSE: KATE). Coach, ended months of speculation as it announced the acquisition of Kate Spade & on May 08, 2017. The all-cash transaction is valued at $2.4 billion. Register with us now for your free membership and blog access at:
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Commenting on the acquisition of Kate Spade, Victor Luis, CEO of Coach said:
"Through this acquisition, we will create the first New York-based house of modern luxury lifestyle brands, defined by authentic, distinctive products, and fashion innovation. In addition, we 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."
Craig A. Leavitt, CEO of Kate Spade & Company, added:
"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."
Terms of the acquisition
As per terms of the acquisition, Coach will pay $18.50 in cash for each share of Kate Spade. The offer price is at a 9% premium of Kate Spade's closing price of $16.97 on May 05, 2017, the last trading day before the deal was announced and a 27.5% premium of the closing price of Kate Spade's shares as on December 27, 2016, the day before the merger speculation started doing the rounds. The deal has been approved by the Board of Director of both Companies.
The transaction is expected to close in Q3 2017 subject to approvals from Kate Spade's shareholders, regulatory bodies, and certain closing conditions.
Coach plans to use a mix of cash in hand, which is around $1.2 billion, funds from senior notes and fresh debt to finance the acquisition. Coach plans to use part of the available cash in hand to pay off approximately $800 million 6-month term loan. It has already received financial commitment from BofA Merrill Lynch for bridge financing for the deal.
Coach will continue to support the growth of Kate Spade as an independent brand and plans to retain key talent. This is to ensure that Kate Spade can be smoothly integrated within Coach.
Benefits for Coach
Coach expects that the deal will result in run rate synergies of approximately $50 million within three years of the closing of the deal. These cost synergies will be achieved by way of operational efficiencies, improved scale, and inventory management, and the optimization of Kate Spade's supply chain network. Coach plans to put an end to Kate Spade's online flash sales and wholesale presence in a bid to curtail losses at the same time concentrate on expanding the brand's presence in lucrative markets like Asia and Europe. The acquisition will be accretive in fiscal 2018 on a non-GAAP basis, and will reach double-digit accretion by fiscal 2019, also on a non-GAAP basis.
Since both the Companies are in a similar business, the acquisition will allow Coach to transform into a customer-focused, multi-brand organization. The acquisition allows Coach to expand its product range, market share and geographic footprint. The deal also allows Coach to tap into the high growth demographic of young, trendy, and fashion conscious millennials. This is a demographic where Kate Spade has strong presence and following. The acquisition allows Coach to tap into an additional revenue stream, as Kate Spade had expanded into lifestyle products like bedding and kitchen accessories.
The current acquisition of Kate Spade is the latest in a series of acquisitions by Coach, aimed at helping the Company cope with sluggish demand and revive its growth fortunes. Coach has been making numerous changes in its management team and business practices to turnaround the Company. Coach had acquired designer shoe Company Stuart Weitzman for $574 million in 2015. This acquisition had boosted sales of Coach at a time when its other businesses were struggling to cope with sluggish demand. On May 02, 2017, Coach disclosed its financials for Q3 for fiscal 2017 and reported total net sales of $995 million and total gross profit of $706 million. The Company's Comparable Store Sales increased 3% during this period.
Kate Spade has been struggling to perform in the last few years due to sluggish demand, declining footfalls in stores and the woes of deep discounting. It has been scouting for strategic partners since November 2016, in the wake of pressure from hedge fund Caerus Investors, which was unhappy with the Company's inability to achieve profit margins as compared to its industry peers.
On Monday, May 08, 2017, the stock closed the trading session at $44.71, climbing 4.81% from its previous closing price of $42.66. A total volume of 13.70 million shares have exchanged hands, which was higher than the 3-month average volume of 3.47 million shares. Coach's stock price surged 21.40% in the last three months, 28.95% in the past six months, and 16.06% in the previous twelve months. Furthermore, since the start of the year, shares of the Company have gained 28.82%. The stock is trading at a PE ratio of 24.21 and has a dividend yield of 3.02%. At Monday's closing price, the stock's net capitalization stands at $12.58 billion.
At the close of trading session on Monday, May 08, 2017, Kate Spade's stock price jumped 8.31% to end the day at $18.38. A total volume of 125.43 million shares were exchanged during the session. The Company's share price has surged 21.32% in the past six months. The stock currently has a market cap of $2.36 billion.
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