There are a lot of questions surrounding Tapestry Inc.’s acquisition of Capri Holdings.
Will Tapestry sell off Capri’s Versace and Jimmy Choo brands to fund the deal? Will the turnaround chops Tapestry displayed at Coach work for Michael Kors? Will the arrival of a much larger group reset the competitive dynamic in American fashion?
But the question investors seem to be asking themselves most immediately is: Will the deal get done?
When Tapestry’s chief executive officer Joanne Crevoiserat signed on the dotted line in August, the price on Capri was $57 a share, valuing all the company’s shares at $6.7 billion.
While Capri’s stock shot up 55.8 percent to $53.90 the day the deal was announced, investors have become much more bearish. The stock closed at a nearly 23 percent discount from the deal price on Tuesday, at $44.03.
It’s common for shares of companies waiting for a buyout to close to trade at a bit of a discount — something could always go wrong — but that’s unusually widespread. And a good part of the disconnect can be attributed to angst around regulatory approval for the deal, analysts suggest.
In November, the Federal Trade Commission reached out to both Tapestry and Capri with a second request for more information so they can evaluate the deal.
Second requests aren’t unheard of, but it certainly raised some eyebrows among traders, who are trying to gauge whether the deal will go through and their shares will suddenly be worth $57 each or if the deal will falter, leaving them to the whims of the market.
“In the merger arbitrage world, the stock price has to do with the probability of outcomes,” said Oliver Chen, an analyst at TD Cowen. “It’s really people doing math around risk.”
In the case of Tapestry’s deal for Capri, Chen said investors are working those calculations with “a lot of unknowns.”
“We’ve seen general weakness in the wholesale channel,” he said. “We’ve seen volatility in China.”
Capri’s business has weakened significantly since the deal was struck. Revenues fell 5.6 percent year-over-year to $1.4 billion for the quarter ended Dec. 30, while adjusted profits fell to $142 million from $240 million a year earlier.
While that could give a buyer some pause, Chen said he was “cautiously optimistic that Tapestry assumed pretty conservative guidance” for Capri.
And then there are concerns around just how the FTC will evaluate the deal.
Darrell Prescott, an attorney and antitrust expert, said: “I would have thought that by now they would have come into compliance with the second request. Once you come into compliance, the FTC has 30 days to either let it go or go to court and get an injunction against the deal.”
From the outside at least, the deal appears to be pretty straightforward in antitrust terms.
“I’d be very surprised if combining these brands would give Tapestry and Capri market power in the sale of garments or accessories — market power is simply a term for the ability to increase price or decrease supply and decrease quality,” Prescott said. “From the labor standpoint, would they have the ability to reduce wages to employees who have very few or no other alternatives? Again, that seems farfetched.
“It seems to me like an easy case to clear because there are so many other luxury and near-luxury brands,” he said. “This all leads me to wonder if during the compliance with the second request, the FTC stumbled onto some issue that is not merger specific.”
While the companies await word from the FTC, antitrust officials in Europe are expected to weigh in on the deal next week.
Tapestry declined to comment and Capri did not respond to a WWD query. Companies in the midst of a deal typically don’t talk specifics.
But Crevoiserat told analysts on a conference call in February: “We remain excited about the runway ahead. We recognize the opportunity to unlock value by improving execution, leveraging the Tapestry platform, and we have continued confidence…that our strategies and our execution deliver. And in terms of the deal, the economics remain strong. We’re making progress as we expected toward the close in this calendar year, that’s unchanged from our prior outlook.”
Scott Roe, chief financial officer and chief operating officer, added that Tapestry continued to work toward obtaining all the required approvals for the deal and that the transaction had been cleared in China.
“In terms of timing, we remain confident in our ability to complete the transaction with a close expected in calendar 2024, consistent with our original expectations,” Roe said.
