On Monday, Coach Inc. reached an agreement to purchase Kate Spade & Company for a cash transaction of $2.4 billion 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 six-month term loan. The transaction is expected to close in the third quarter of calendar 2017, subject to customary closing conditions, including the tender of a majority of the outstanding Kate Spade & Company shares pursuant to the offer and receipt of required regulatory approvals. Coach has secured committed bridge financing from BofA Merrill Lynch.
Craig A. Leavitt, chief executive officer of Kate Spade, said, “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.” Coach’s chief financial officer, Kevin Wills, expects the complementary nature of both businesses to help realize a run rate of approximately $50 million in synergies within three years of the deal closing. These cost synergies will be realized through operational efficiencies, improved scale and inventory management, and the optimization of Kate Spade’s supply chain network. “At the same time, to ensure the long-term viability and health of the Kate Spade brand, and similar to the steps Coach has itself taken over the last three years, we plan to reduce sales in Kate Spade’s wholesale disposition and online flash sales channels. Therefore, the reduction in profitability from the pullback in these channels will be offset by the realization of these substantial synergies. As a result, we expect that 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,” Wills said.
Victor Luis, Chief Executive Officer of Coach, Inc. said of the deal, “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. We are confident that this combination will strengthen our overall platform and provide an additional vehicle for driving long-term, sustainable growth.”
Luis defines modern luxury, the space where he sees the Coach brand, “as about quality and great design, while at the same time offering the customer an emotional experience through great brands, its history and narratives. Modern for us is different from the traditional European groups. [For us,] it’s about being inclusive, not exclusive based on price. It is not based on a country of origin, [nor] is it made in any specific market as traditional luxury brands are.”
Prior to the purchase, analysts have long speculated Coach as a potential buyer of Kate Spade, citing the sourcing and wholesale capabilities Coach could offer the Kate Spade brand, but little has been said on what Kate Spade brings to Coach. WWD notes that when Coach acquired Stuart Weitzman for $574 million in 2015, Coach at the time had its footwear line produced under license with Jimlar, but since last year, Coach has been producing majority or all of its footwear in-house. Luis explained that what Coach Inc. can learn from Kate Spade is centered on the licensing space and possible opportunities for the Coach brand. “Kate Spade has a broader licensed portfolio in categories we’re not present in. We can learn about those opportunities and how they manage them,” he told WWD.
Kate Spade & Company operates principally under two global, lifestyle brands: Kate Spade New York and Jack Spade New York. The company also owns Adelington Design Group, a private brand jewelry design and development group that serves J.C. Penney via exclusive supplier agreements for the Liz Claiborne and Monet jewelry lines.