The prospective $8.5 billion merger with Coach parent Tapestry was rejected by a U.S. judge on Friday, which harmed Capri’s chances of overcoming obstacles at the luxury brand. As a result, Capri shares fell by about 46%.
Last year, Tapestry agreed to purchase Capri to establish a luxury conglomerate in the United States that could more effectively compete with bigger European rivals by consolidating names such as Coach, Kate Spade, Stuart Weitzman, Versace, Jimmy Choo, and Michael Kors.
With Capri stock trading at $22.46, much below Tapestry’s offer price of $57 per share, the company was poised to lose $2.2 billion in market value.
At a time when demand in the luxury sector is slowing down and customers are saving their money for necessities, Capri’s wide range of brands has seen market share losses due to poor execution.
The acquisition would end “direct head-to-head competition” between the two leading U.S. handbag manufacturers, according to the Federal Trade Commission’s (FTC) April lawsuit to prohibit it.
According to Dana Telsey of Telsey Advisory Group, “Capri could potentially seek another suitor” if the agreement falls through.
Due to pressure from Capri’s poor performance and a prolongation of the deal deadline after the FTC challenge, Dana stated that “the attractiveness of the acquisition began to moderate.”
The stock of Tapestry increased by almost 15%. Despite being well-positioned to bring Capri back to life, analysts argued the transaction would have presented an additional risk to the Coach parent company.
The FTC said during an eight-day trial in September that the agreement would establish a large corporation with the authority to unjustly raise prices.
The corporations’ defence, which included the claim that handbags are not necessities and that customers can control prices by refusing to purchase them if they become too costly, was dismissed by U.S. District Judge Jennifer Rochon on Thursday.
“Investors were clearly surprised by the outcome as it seemed like the focus of the deal was to compete at the global luxury level and not just the U.S. market,” said Brian Jacobsen, chief economist at Annex Wealth Management.
Tapestry stated that it intends to appeal the decision because it feels it was wrong.
“I think the (defence) parties might try to get an expedited appeal to the second circuit. I think they do have a chance on their timeline to do that,” said Mike Keeley, partner and chair of the antitrust group at Axinn, Veltrop & Harkrider LLP.
