After months and months of speculation, Coach Inc. announced today that it will acquire rival handbag and accessory brand Kate Spade & Company, in a sweeping deal for a cool $2.4 billion. The move will put Coach, Kate Spade and Stuart Weitzman (bought by Coach in 2015) under one roof and create what the company has described as the “First New York-Based House of Modern Luxury Lifestyle Brands.”
The agreement has already been unanimously approved by the Boards of Directors of Kate Spade & Company and Coach, Inc. and is set to close in the third quarter of this calendar year. Under terms of the transaction, Kate Spade shareholders will receive $18.50per share in cash.
The transaction is not subject to a financing condition, as Coach has secured committed bridge financing from BofA Merrill Lynch. The exorbitant 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.
In a statement, Victor Luis, Chief Executive Officer of Coach, Inc. said, “Kate Spade has a truly unique and differentiated brand positioning with a broad lifestyle assortment and strong awareness among consumers, especially millennials.”
Luis also went on to emphasize the company’s new positioning, saying, “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.”
While the company’s strategic rationale of creating a leading luxury lifestyle brand with a diverse multi-label portfolio was made quite clear in its announcement, some industry experts are asking if the merger will work.
Mergers and acquisitions expert Richard Kestenbaum wrote in Forbes earlier today as the news broke that both are legacy brands, mature in their respective life cycles. He questioned whether consumers will continue to be interested, but the merger makes sense to keep production and operating costs down. Ultimately, he says, it will come down to management.
“The long-term question about this deal is unanswerable now, to make it work management is going to have to change its culture,” Kestenbaum writes. “Almost no legacy companies have been able to accomplish that so far, changing a culture is the hardest thing to do in a business.”
Still the company is charging ahead with optimistic expectations. Looking forward, Luis went on to say, “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. We are confident that this combination will strengthen our overall platform and provide an additional vehicle for driving long-term, sustainable growth.”