INTRODUCTION
On August 10, 2023 Tapestry announced its strategic move to acquire Capri Holdings, the parent company of Versace and Michael Kors, for $8.5 billion. This merger is anticipated to be finalized in 2024, positioning Tapestry as a major player in the luxury market, with a combined revenue exceeding $12 billion and holding approximately 6% of the $200+ billion global luxury apparel and accessories market. The CEO of Tapestry commented:
“This combination expands our reach across customer segments, across geographies and product categories… It gives us an opportunity to leverage our direct-to-consumer platform and importantly increases our access to the luxury consumer”.
COMPANY OVERVIEWS
Tapestry
Tapestry Inc., a global luxury accessories and lifestyle brand conglomerate, stands at the forefront of the fashion industry with iconic brands like Coach, Kate Spade New York, and Stuart Weitzman under its umbrella. Headquartered in New York, the company boasts a diverse product portfolio ranging from handbags, accessories, and footwear to ready-to-wear items, jewellery, and home decor.
Operating through three distinct segments—Coach, Kate Spade, and Stuart Weitzman—Tapestry caters to a worldwide market, with a significant presence in North America, Europe, the Middle East, and Asia-Pacific. Coach segment focuses on global sales through various channels, including Coach-operated stores, e-commerce, and wholesale distribution. Similarly, Kate Spade and Stuart Weitzman segments target specific brand enthusiasts through their own operated stores, concessions, and third-party distributors.
Capri Holdings
Capri Holdings Limited, a global fashion luxury group, houses iconic brands such as Versace, Jimmy Choo, and Michael Kors. Formerly known as Michael Kors Holdings Limited, the company rebranded to Capri Holdings Limited, signifying its expanded portfolio. Headquartered in London, it operates through three key segments, embodying the unique style of Versace, Jimmy Choo, and Michael Kors.
Versace is celebrated for bold and glamorous styles, Jimmy Choo for luxurious footwear, and Michael Kors for sophisticated fashion. With a global presence spanning the United States, Canada, Latin America, Europe, the Middle East, Africa, and Asia, Capri Holdings caters to diverse markets through various channels. Approximately 14,600 employees contribute to the company’s notable market share, particularly in the Handbag, Luggage & Accessory Stores sector in the U.S., where it accounts for around 4.6% of total industry revenue.
Despite the initial 55% surge in Capri’s shares post-announcement of the deal, the company currently faces some challenges with weak profit and sales projections for fiscal year 2024, which attribute to increased living costs and high inflation impacting consumer budgets and, thus, the demand for luxury brands. Notwithstanding the challenges, Capri’s commitment to style and craftsmanship positions it as a key player in the evolving world of luxury fashion.
DEAL-SPECIFIC INDUSTRY OVERVIEW
The luxury industry involves the sale of high-end products that are associated with exclusivity and brand prestige, featuring excellent quality and high durability that come at high prices. The industry spans various segments such as automobiles, watches and jewelry, accessories, or fashion, with the latter representing the largest sector of the industry.
Over the last several years the industry has experienced increasing concentration of the market players, with LVMH and Kering conglomerates conducting numerous acquisitions of luxury fashion firms, changing the market structure to almost an oligopolistic one. These companies hold portfolios with widely diverse brand compositions, allowing to strengthen their market position and expand their client base.
The global luxury fashion market was valued at $280.92 billion by Arizton Advisory in 2022, while it is expected to reach $401.73 billion by 2028, growing at a CAGR of 6.14%. This growth is mainly fostered by current macroeconomic trends and further supported by industry-specific opportunities. With the recovery from the Covid-19 pandemic and the consequent stabilization in the global economy, higher disposable income of the households boosted consumer confidence and spending on non-essential items such as luxury goods. Moreover, the luxury goods industry has been featuring higher personalization via consumer service improvements, including immersive and high-quality client experience at all levels from online platforms to physical stores. Thus, the companies that foster their innovative potential and succeed in meeting the customer demand will be able to leverage from the expected industry growth.
Despite outstanding profits of global luxury brands in the first half of 2023, sales in the US had a shortfall as aspirational consumers are cutting back on non-essential purchases. Nonetheless US consumer confidence is on the rise, the spendings of aspirational customers are diminishing due to increased credit card interest rates and substantial overloads in credit card debt, which reached an all-time high. As about 60% of industry revenues depend on the behaviour of aspirational clients (and 40% on true-luxury consumers), luxury market experiences a challenging time, putting pressure on aspirational luxury brands in Tapestry’s and Capri’s portfolios.
DEAL RATIONALE
The acquisition of Capri by Tapestry highlights the increasing significance of scale in the luxury industry. Major conglomerates have the necessary means and most importantly know how to foster and grow smaller brands effectively.
The strategic merger of Tapestry & Capri Holdings is expected to play a pivotal role in the luxury market. In essence, this deal unites six compatible brands with a global presence, backed by Tapestry’s data-driven customer engagement platform and diversified direct-to-consumer approach. The acquirer intends to steadily advance Capri’s presence in the direct-to-consumer market, assisting in the adaptation to changing consumer preferences.
The combined company generated over $12 billion in annual sales worldwide, operating in 75+ countries, and recorded almost $2 billion in adjusted operating profit in the previous fiscal year. This expansion enhances global reach and geographical diversity, capitalizing on the highly complementary positions of Tapestry and Capri Holdings in both the Asian and European markets.
Tapestry expects to gain significant advantages from potential synergies, particularly through its robust digital capabilities. Tapestry currently derives around 29% of its revenues from digital channels, providing the opportunity to enhance Capri’s digital sales, which currently account for just 18%.
Tapestry’s CFO and COO, Scott Roe, commented that the transaction will be “immediately accretive on an adjusted basis,” enhancing the overall return for Tapestry shareholders. Run-rate cost synergies, estimated to exceed $200 million, are anticipated within three years from the completion of the transaction. These synergies will be realized through operating cost savings and supply chain efficiencies, further strengthening the financial position of the combined entity.
Tapestry’s goal in the merger is to expand its portfolio in high-margin sectors, allowing to ultimately strengthen its financial health. Capri’s broad product range, with a solid emphasis on lifestyle in footwear and ready-to-wear categories, allows for the firms’ extensive expertise and offers further growth opportunities.
The deal is expected to improve the cash flow position of the combined firm, allowing for the ongoing investments in innovation and expansion, simultaneously supporting the debt reduction initiative as Tapestry is committed to reach a 2.5x Debt/EBITDA ratio within 24 months from post-acquisition.
Forbes analysts comment that for this deal to be successful it needs to be a process of integration, rather than assimilation, emphasising on capturing hidden synergies by leveraging brand capabilities. In the view of Tapestry’s 2017 acquisition of Kate Spade, which was considered “sloppy” due to improper focus on brands assimilation, investors fear a similar outcome for the acquisition of Capri. Forbes highlights that for this merger to succeed the primary focus should be fixed on maintaining the distinctive identity and uniqueness of the brands, which may be quite cumbersome, given that Capri’s and Tapestry’s brands have been competitors and overlap in many aspects.
Nonetheless, the merger is expected to bring extensive synergies, strengthening the market position of the combined entity, while widening its geographical and customer scope, it is associated with some management challenges that are yet to be overcome.
DEAL STRUCTURE
In August 2023 Capri and Tapestry issued a joint press release declaring the execution of the merger agreement and highlighting the main terms of the transaction, according to which Capri’s shareholders will receive $57.00 per share in cash, valuing enterprise value of Capri Holdings at $8.5 billion. The all-cash offer share price represents a premium of approximately 59% to the 30-day volume weighted average price of Capri Holdings pre-announcement. The resulting transaction value represents a 9x adjusted EBITDA TTM multiple (7x incl. expected synergies).
Board of Directors of both the target and the acquirer have approved the transaction, with the merger deal expected to be finalized in 2024. The close of the transaction is subject to the approval of the Capri Holdings shareholders, as well the receipt of required regulatory approvals, and other customary closing conditions. The deal is not bound by any financing conditions.
The acquirer is expecting to fund the purchase price of $8.5 billion by a combination of senior notes, term loans and excess cash held, which will be partially used to repay some of Capri’s outstanding debt. Tapestry confirms that they have entered in a fully committed bridge financing with Bank of America and Morgan Stanley in the amount of $8 billion.
As of the date of the merger announcement S&P Global Ratings affirmed the “BBB” long term credit rating of Tapestry, at the same time revising outlook from stable to negative. Management confirms that Tapestry is committed to maintain a solid Investment grade rating, prioritizing its de-leveraging strategy. Tapestry establishes a 2.5x Debt/EBITDA ratio as the company’s long-term leverage target and aims to achieve this level within 24 months post-transaction.
Together the combined company, with the presence in over 75 countries and its six complementary brands, will hold 6% of the global luxury apparel and accessories market. The merger is expected to accelerate the strategic outline of the companies, allowing for significant value creation opportunities with more than $200 million in expected run-rate cost synergies within three years of deal closing.
Sources: Arizton, Bloomberg, Capri Holdings, Financial Times, Forbes, Mergermarket, Reuters, Tapestry Inc.
Authors: Edouard Bougnoux, Francesca Cantella, Alisha Haque, Lilit Kalantar, Ruslana Karaman, Dardi Sulaj
Bocconi Students M&A Circle 