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Why Coach's $18.50/Share Offer For Kate Spade Is 'Fair'

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Why Coach's $18.50/Share Offer For Kate Spade Is 'Fair'
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The Bag With The Swag: Coach Initiated At Buy After 'Game-Changer' Kate Spade Acquisition

After months of speculation, Kate Spade & Co (NYSE: KATE) confirmed Monday it has agreed to sell itself to rival Coach Inc (NYSE: COH) for $18.50 per share.

Kate Spade's profile as a potential M&A target dates back to late 2016, when the company faced pressure from an activist investor and major shareholder to "take steps to realize shareholder value by pursuing a sale of the company."

By April, a sale of Kate Spade had't happened yet and the stock traded as high as $24.24. But optimism over the deal faded and the stock dipped below the $20 per share mark and closed at $16.97 on Friday. As such, Monday's announcement could prove to be a disappointing outcome for many shareholders who bought the stock at a higher price over the past few months.

'Fair Price'

Wunderlich's Eric Beder commented in a report that Coach's offer of $18.50 per share is a "fair price" when considering Kate Spade's recent earnings report which consisted of its weakest revenue growth in five years and a negative 2.4 percent comp.

Beder also noted that the price tag implies a 27.5 percent premium to where Kate Spade's stock was trading before media reports of a potential sale surfaced.

For Coach, the acquisition gives the company exposure to Kate Spade who is consider "more of a handbag lifestyle than a handbag-focused brand." Coach could also realize "material" earnings per share and organic growth moving forward.

The analyst doesn't believe other bidders will emerge and the likelihood of Coach's acquisition receiving the necessary regulatory approval is "a near certainty."

'Beyond Brilliant' Move

Rick Helfenbein, president and CEO of American Apparel and Footwear Association, was a guest on CNBC to offer his expert knowledge on the deal.

Coach scored an acquisition that is "beyond brilliant," especially based on the composition of the client base. Specifically, the deal will combine Coach's "truly classic and brilliant brand" with Kate Spade's strong influence over millennials.

Helfenbein expanded that millennials these days aren't spending less money. Rather, they're spending more money on themselves, including on handbags where sales are up 20 percent from a year ago.

The trend Helfenbein is referring to is the "selfie generation" where everyone needs to look their best for the next selfie that makes it way to social media networks.

Finally, Helfenbein added that Coach's acquisition could foreshadow its long-term plan to take on the European fashion giants.

See also:

Deckers Outdoor Potential M&A: From Rumor To Reality

Are Improving Trends Enough To Send Coach Bears Back Into Hibernation?

Latest Ratings for COH

DateFirmActionFromTo
Nov 2017SusquehannaInitiates Coverage OnPositive
Oct 2017BairdMaintainsOutperform
Oct 2017BuckinghamMaintainsBuy

View More Analyst Ratings for COH
View the Latest Analyst Ratings

Posted-In: accessories Apparel Coach Eric BederAnalyst Color News M&A Analyst Ratings Best of Benzinga

 

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