After Months Of Rumors, Coach Is Buying Kate Spade For $2.4 Billion

On Monday, luxury retailer Coach Inc. (NYSE:COH) announced that it is buying handbag rival Kate Spade (NYSE:KATE) in a deal worth $2.4 billion. Coach has been trying to remake its brand, cutting back on promotional discounts and pulling its products out of department stores, and scooping up Kate should help them during this transformation.

Under the terms of the deal, Coach will pay $18.50 per share for Kate Spade, representing a 27.5% premium to the closing price of shares of KATE on December 27, 2016. Both company boards have approved the transaction. The $2.4 billion deal will be funded by a combination of senior notes, bank term notes, and $1.2 billion in cash.

“Kate Spade has a truly unique and differentiated brand positioning with a broad lifestyle assortment and strong awareness among consumers, especially millennials,” said Victor Luis, CEO of Coach. “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.”

“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,” said Craig A. Leavitt, CEO of Kate Spade.

Year-to-date, shares of Coach have gained almost 22% in value. After being dethroned by Michael Kors (NYSE:KORS) as the top U.S. handbag maker, the iconic American retailer is making a name for itself again in the luxury market. The company decided to exit from department stores like Macy’s (NYSE:M) and cut back on big sales events that had ultimately cheapened the Coach brand; just last week, Coach reported a profit beat and its fourth straight quarter of rising comparable sales in its North American market.

Coach hopes to employ the same business strategies at Kate Spade, a luxury company that has struggled lately. While the company saw a decent boost last year, raking in revenues of $1.38 billion, shares of Kate Spade have lost about 9.1% year-to-date, and the company even came under pressure from activist hedge fund Caerus Investors last fall since its profit margins were well below its rivals.

The deal is expected to close in the third quarter of calendar 2017. Coach’s financial advisor was Evercore Group and its legal advisor is Fried, Frank, Harris, Shriver & Jacobson. Kate Spade's financial advisor was Perella Weinberg and its legal advisor is Paul, Weiss, Rifkind, Wharton & Garrison.

Interested in the state of the luxury retail industry? Check out this episode of Zacks Shopping for Stocks, where Editor Maddy Johnson takes a look at the luxury sector of the retail industry. Are these brands slowly fading away?

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