Momentum gaining in Capri ($CPRI)

I think there is still an attractive opportunity to catch some good investor sentiment in the closing of the Tapestry and Capri acquisition. Although the stock has appreciated some, I still think there are returns to be found by going long all the way throughout the trial case, as it has gotten messy. The FTC doesn’t have a legitimate case for blocking this deal and with shares still trading at a significant discount to the deal price of $57, I see now as an attractive entry point.

Capri Holdings Limited, based in London and founded in 1981, is a global player in the fashion industry. The company, formerly known as Michael Kors Holdings Limited until it rebranded in December 2018, is behind three major brands: Versace, Jimmy Choo, and Michael Kors. Capri Holdings offers a wide range of products, from clothing and footwear to accessories like eyewear and jewelry. You can find their items in boutiques, department stores, specialty shops, and online. They also have licensing deals for things like watches and fragrances. The most recent FY revenue is $5.6 billion, and the stock is trading at $39.36 at the time of this writing, up 31 % in the past month but down 21 % on the year.

Tapestry, Inc., based in New York and founded in 1941, is a major player in luxury accessories, operating under Coach, Kate Spade, and Stuart Weitzman. They offer a wide range of products, from handbags and small leather goods to footwear, jewelry, and home items. Tapestry sells through retail stores, online, and other distributors. The company changed its name from Coach, Inc. to Tapestry in 2017. The most recent FY revenue came in at $6.6 billion and the stock is at $42, up 10% on the year, despite a weak consumer environment. China exposure is dragging down the stock as sales in China fell 13% during the last quarter.

Here is a little background info on the deal;

Announced in August of 2023 for $8.5 Billion

Regulators in Japan and the European Union approved the deal in April

Blocked in April of 2024 by FTC due to antitrust concern

Trial begins September 9th

The deal would create the 4th largest luxury retailer globally and would place Tapestry in a position to compete with bigger overseas competitors.

“This deal threatens to deprive consumers of the competition for affordable handbags.” -Henry Liu, Director of F.T.C’s Bureau of Competition. Essentially, the FTC is worried that this “NewCo” will hurt consumers because the two companies would offer competitive pricing but now the “NewCo” has more pricing power over it’s market.

Capri CEO, John Idol has a lot on the line right now with the deal in court. If the deal goes through him and his family will receive about 210 million dollars in stock payouts.

Under Idol, Michael Kors has seen their revenues skyrocket from $20 million in 2003. To $4.7 billion in 2016. Since then sales of Michael Kors handbags have slumped and Idol attributes this to increasing competition, this is the complete opposite of the FTC ruling which say the deal would eliminate competition. Michael Kors CEO, Cedric Wilmotte gave some interesting insight on the state of the legacy brand on day 4 of the court case. He stated challenges such as brand fatigue and weak execution on it’s growth strategy keying in on the fact that Tapestry is better equipped to bring the brand back to its glory days.

If you look at the consumer market, specifically handbags, there’s no barrier to entry. You can go buy a $10 Louis Vuitton handbag on the streets of Time Square, or go buy a real one for $2000. On a little bit of the modest side, you could decide to go buy a Michael Kors handbag for $250. Nothing is preventing anyone from expressing themself in any way they feel like.

Court documents state, “No matter, according to Defendants: these products are "discretionary purchases" and"not a food staple to feed a family." Id.' But there is not any exemption from the antitrust laws for consumer goods. These products matter in the day-to-day lives of Americans, whom the FTC is tasked with protecting from anticompetitive mergers.” If these products are “luxury”, then a certain demographic buys them. The demographic with money. So the FTC wants to have control over the choices of people with more choices than the average consumer? I think the FTC’s case is contradicting and they don’t really know why they want to block the deal. The case is all hanging in on how some words are defined.

This isn’t an Amazon situation where they’re being sued by the FTC in 17 states for allegedly maintaining a monopoly but the FTC is claiming that this deal would allow Tapestry some major leverage over the handbag industry. Specifically, the accessible luxury industry, in which the FTC describes as $100 through $1000, even though a majority of Michael Kors and Kate Spade handbags fall outside of $100.

When looking at each company’s highest-selling brands, Coach leads Tapestry’s set of brands, and their handbag’s average prices range from $150 to $500. Looking at Capri, the average price of a Michael Kors bag is $150 to $400, but with a good amount falling outside the $100 range. Knowing this confirms the fact that if this deal goes through, then sure, maybe Tapestry would control over 50% of the accessible luxury handbag market but the market will still be competitive and super accessible. I think that the accessible handbag market is an easy-to-access market that is driven by trends, specifically social media and celebrity influencers. Take for example the Brandon Blackwood Kendrick Trunk Bag, now you probably haven’t heard of this brand but it boasts fans such as Kim Kardashian, Olivia Rodrigo, and Normani. The bag only retails for $300-$500 and has skyrocketed in popularity since it’s essentially become a “trend” to wear it. I think this example eliminates all the questions about the competitive mechanics of the accessible handbag market.

It’s been a tough deal market and a tough trading environment for merger arbitrage plays. Bloomberg merger arb index is up 2.66% this year and funds are cutting a lot of their merger arb specialist as profits grow tight. In a tough deal-making environment, “the global value of M&A activity in the first half of 2024 was $1.0 trillion. Although this figure is 4% higher than that of the same period last year, it is below the ten-year average of $1.5 trillion” according to BCG. Another notable deal that is hanging in the balance of the government is the Nippon Steel acquisition of US Steel for $14.9 billion, the reason for this merger is very similar to Tapestry’s reasoning, it would help Nippon Steel become more equipped to compete with Chinese steel companies as China produces more than half of the world’s steel. Biden is poised to block this deal as he thinks the deal could harm the American steel industry, he also thinks it puts pressure on international business relationships.

I think you can forget all the EPS, revenues, and multiples for Capri until after the court case. Simply put, the fundamental bet is the court trial, and that will swing the stock. The only thing that matters now is that as time goes on, investor sentiment is turning more positive on the stock, and traders think that the deal has more and more of a chance to go through.

This is my first merger arbitrage play and it’s pretty fun so we’ll see it how it goes. You almost have to turn into a lawyer.