Capri-Tapestry Deal Faces Antitrust Hurdles
Tapestry Inc. announced its intention to acquire Capri Holdings Limited on August 10, 2023, for $57 per share. However, the Federal Trade Commission (FTC) filed a complaint on April 22, 2024, to block the deal, citing antitrust concerns. The FTC alleges that the merger would create a dominant player in the “accessible luxury” handbag market and negatively impact employees.
Tapestry disputes the FTC’s conclusions, arguing that the markets in which they compete are competitive and fragmented. The company also maintains that it provides industry-leading wages and benefits to its employees.
The case is expected to proceed to court, with a judge assigned to oversee the proceedings. The outcome of the trial is uncertain, but analysts believe there is a 60% chance that the deal will be approved.
Preliminary Valuation
Before Tapestry’s offer, Capri’s stock was trading at around $35 per share. After the offer was announced, Capri’s shares rose to $53 per share. However, since then, the shares have declined to $35 again, suggesting that the market is skeptical about the deal’s prospects.
Background on Antitrust Policy
The Biden administration has pursued an aggressive antitrust policy, bringing a number of cases to stop transactions that might have been approved under previous administrations. This shift reflects a desire to roll back the influence of the Chicago School, which has prioritized price and free-market efficiency, and adopt a broader conception of market power and consumer welfare.
The FTC’s Argument
The FTC’s argument against the Tapestry-Capri merger is based on the following elements:
* Michael Kors, a key brand owned by Capri, is a close competitor to Coach and Kate Spade, owned by Tapestry.
* The merger would result in Tapestry dominating the “accessible luxury” handbag market.
* The acquisition could negatively impact a combined 33,000 employees.
Tapestry disputes these claims, arguing that the markets are competitive and it provides industry-leading wages and benefits to its employees.
What Next?
The merger agreement is set to expire on August 10, 2024. However, it can be extended in three-month increments due to legal challenges. Historically, trials in similar cases have taken roughly 3 to 8 months from the date of the FTC’s complaint.
Handicapping the Trial Outcome
The merger could be blocked on any of the FTC’s three major issues, or any others raised during the trial. Analysts have assigned probabilities of success to each argument:
* Michael Kors is a close competitor to Tapestry brands: 10%
* Tapestry would become dominant in accessible luxury handbags: 30%
* 33,000 employees would be harmed: 5%
Based on these probabilities, analysts estimate a 60% chance that the deal will proceed.
The Judge
The judge assigned to the case, John Koeltl, dismissed an antitrust case in 2019 based on alleged collusion between art museums. While that decision was more procedural in nature, this case has more legal merit coming from the FTC.
Implied Value of Capri
Capri’s financial performance has weakened in recent quarters, with a decline in operating income and earnings per share. Analysts estimate that without the prospect of a Tapestry offer, Capri’s stock might be trading at around $29 per share. This suggests a potential upside of 22% if the deal is approved.
Conclusion
Capri Holdings appears to be an attractive investment opportunity, offering a potential return of 22% if the merger with Tapestry is approved. The legal proceedings provide a catalyst for the stock, but there are also risks associated with the investment. Analysts believe the deal has a 60% chance of succeeding, but investors should proceed with caution and consider the potential for an unfavorable outcome.
