The luxury handbag maker Coach Inc has announced plans to buy competitor Kate Spade in a striking $2.4 billion deal. As per the terms of the deal, Coach is paying $18.50 per share per share of Kate Spade, a 27.5% premium on its stock on December 27, before the rumors of a possible acquisition surfaced.
After the acquisition, Kate Spade will enjoy its position in the market as an independent brand. Globally, the upscale retailer has 133 specialty stores, 82 outlets stores and 54 franchises exclusively in foreign markets.
In February, Kate Spade confirmed it was considering “strategic alternatives,” as the luxury retailer faces pressure from U.S. hedge fund Caerus Investors, which said the company would make an excellent acquisition target. Spade, known for its quirky and kaleidoscopic satchels and totes faces a strong U.S. dollar that hurts foreign tourist spending.
In February 2017, Kate Spade reported sales growth of 9.3 percent, including its e-commerce operations in the quarter that ended in December 31, 2016. Its store sales fell 1.5 percent. Meanwhile, its net income jumped to $85.55 million, or 66 cents per share, during the quarter, from $61.46 million or 48 cents per share, a year earlier.
US Handbag Wars: Who is winning, how?
Handbag maker Coach Inc. has been looking for an acquisition for months now, as it looks to turn around its business in the ever-slow handbag market. Millennials don’t seem to be jazzed about buying handbags anymore. According to a Morgan Stanley study, the millennial generation increasingly choose to pay for experiences rather than luxury goods. The declining interest has left retailers worry over slow-growth and total retail sales year-on-year. According to a Goldman Sach’s report, Coach followed by Michael Kors is the most well-known brand among girls in the age group of 13 to 29. The brands are highly accessible due to a rife presence in thousands of malls, department, retail and outlet stores across the US.
Unlike Coach and Michael Kors, Kate Spade has had to adjust its products to a more whimsical look to attract the Millennial buyers. While at the same time, it is facing competition from new-entrants like Tory Burch, cutting into the same share of buyers.
Coach expects the deal to close by the end of the third quarter of 2017. The acquisition will help Coach generate $50 million in annual savings by combining Kate’s inventory management and supply chains.