Coach says it is focused on preserving Kate Spade’s brand independence as well as retaining key talent in order to ensure a smooth transition

Coach says it is focused on preserving Kate Spade’s brand independence as well as retaining key talent in order to ensure a smooth transition

Coach Inc has signed a definitive agreement to acquire accessories and apparel business Kate Spade in a deal worth US$2.4bn.

Under the terms of the sale, Kate Spade shareholders will receive $18.50 per share in cash, while the transaction represents a 27.5% percent premium to the unaffected closing price of Kate Spade's shares as of 27 December 2016, the last trading day prior to media speculation of a transaction.

The deal, which has been unanimously approved by the board of directors for both companies, has silenced months of speculation regarding reports Kate Spade was exploring a sale of the company, amid allegations over potential insider trading.

Kate Spade exploring sale amid insider trading claims?

Now, Coach has secured committed bridge financing from BofA Merrill Lynch, while the purchase is expected to be funded by a combination of senior notes, bank term loans and about $1.2bn of excess Coach cash, a portion of which will be used to repay an expected $800m six-month term loan. The transaction is expected to close in the third quarter of 2017.

According to both companies, the combination of Coach and Kate Spade will create a "leading luxury lifestyle company" with a more diverse multi-brand portfolio supported by significant expertise in handbag design, merchandising, supply chain and retail operations as well as solid financial acumen.

Meanwhile, Coach says it is focused on preserving Kate Spade's brand independence as well as retaining key talent in order to ensure a smooth transition.

"Kate Spade has a truly unique and differentiated brand positioning with a broad lifestyle assortment and strong awareness among consumers, especially millennials," says Coach CEO Victor Luis. "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. In addition, we believe Coach's extensive experience in opening and operating specialty retail stores globally, and brand building in international markets, can unlock Kate Spade's largely untapped global growth potential. We are confident this combination will strengthen our overall platform and provide an additional vehicle for driving long-term, sustainable growth."

Meanwhile, Coach CFO Kevin Wills, says the company expects to realise a run rate of about $50m in synergies within three years of the deal closing. These cost synergies will be realised through operational efficiencies, improved scale and inventory management, and the optimisation of Kate Spade's supply chain network, he says.

At the same time, to ensure the "long-term viability and health of the Kate Spade brand", Coach plans to reduce sales in Kate Spade's wholesale disposition and online flash sales channels. As a result, Wills says he expects the acquisition to be accretive in fiscal 2018 on a non-GAAP basis, and will reach double-digit accretion by fiscal 2019, also on a non-GAAP basis.

Craig Leavitt, Kate Spade CEO, adds: "Following a thorough review of strategic alternatives, reaching an agreement to join Coach's portfolio of global brands will maximise 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. We look forward to working with Coach's leadership team to leverage their expertise across the business as we continue to innovate and build long-term loyalty with consumers and expand across our product category and geographic axes of growth."

Neil Saunders, managing director of GlobalData Retail, noted that while he is positive about Coach's move on Kate Spade, successful execution will require a degree of separation between the two businesses.

"The brands must remain distinct, which means the creative thinking and strategy of both businesses cannot become too intertwined," he explains. "It is also the case that the main Coach brand, while in much better health, still needs much nurturing and care in a very tough environment; as such the company will need to keep a dual focus on both its new and established businesses.  

"Ultimately the aim for Coach is to become a business with a portfolio of distinct and compelling luxury brands. Today's announcement is the solid step on that journey."

 Last week, Coach reaffirmed its full-year outlook despite booking mixed third-quarter results.

Coach reaffirms outlook despite mixed Q3

Meanwhile, Kate Spade saw earnings slump to US$1.4m in the three months ended 1 April, from $11.6m a year earlier. The company incurred a $7m of pre-tax store impairment charge and $2m of pre-tax fees and expenses related to its strategic review. 

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