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Coach Bags Kate Spade: Here's What The Experts Think Of The Deal

May 13, 2017 9:44 am
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The luxury goods space saw a M&A announcement earlier this week. Coach Inc (NYSE:COH) announced a deal to buy Kate Spade & Co (NYSE:KATE) for $18.50 per share, or a total transaction value of $2.4 billion in cash.

The deal is expected to close in July and will be financed with $1.2 billion in cash on hand and new debt amounting to $2.1 billion. Coach expects the deal to be slightly accretive to earnings in 2018, with double-digit accretion expected in 2019.

Baird: ‘We Like The Deal On Its Merits’

Baird said it likes the deal on its merits, including complementary brand positioning, meaningful synergies, long-term growth runway, etc. Long term, the firm believes the deal is a significant step in Coach’s evolution toward a multi-branded organization.

Analyst Mark Altschwager believes Kate Spade is a good fit for the growing Coach brand portfolio. Although the two handbag brands have overlap, the analyst believes the price points, customer bases and distribution profiles are highly complementary. Additionally, the analyst believes the accretion guidance is conservative.

UBS: Transaction Makes Strategic Sense

UBS analyst Michael Binetti said he sees strategic sense in the deal, based on Coach’s opportunity to integrate Kate Spade to its best-in-class supply chain, reverse recent brand headwinds and accelerate Kate’s international opportunity. Additionally, UBS believes Kate’s revenue opportunity is bigger.

UBS thinks Coach has the right strategy to turn Kate Spade.

“We think COH has the right strategy to tap KATE’s strong Millennial brand scores & reverse recent pricing issues,” the firm said.

Credit Suisse: Deal Delivers On Big Opportunities

Credit Suisse analysts Christian Buss, Sara Shuler, Pallavi Bakshi and Christine Lee see the deal as delivering on what they view as one of its biggest opportunities, namely the potential to take its efficient distribution model and recent return to sales discipline and apply it to acquired brands.

The analysts expect $0.41 per share accretion from the acquisition over time.

However, the analysts said, “While there are many compelling opportunities in this acquisition (particularly the access to a younger demographic, the potential for Kate Spade in APAC, cost savings), we are concerned about the company’s choice to emphasize the challenged handbag category and U.S. distribution.”

“We believe that Coach may be in a position where the combination of Kate Spade and Coach creates revenue dis-synergies in the short-term, while international growth may take years to gain traction.”

Credit Suisse views the accretion potential as compelling, and it continues to believe that Coach has the capacity to make further acquisitions over time.

Rating/Price Target

  • Baird maintains its Outperform rating on the shares of Coach and raised its price target to $50 from $48 to reflect potential form about $0.20 of earnings per share upside in its out-year model.
  • Meanwhile, UBS maintains its Buy rating and $49 price target for Coach shares.
  • Credit Suisse has an Outperform rating on the shares of Coach, while it raised its target price to $55 from $46 to reflect the potential for $0.41 in net accretion over the next two years.

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Image Credit: By Shoshanah (My new Coach Bag!) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

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