On Thursday, Tapestry, Inc (NYSE: TPR) disclosed plans to acquire Capri Holdings Limited (NYSE: CPRI) for $57.00 per share in cash for a total enterprise value of approximately $8.5 billion.
The purchase price implies a premium of approximately 59% to the 30-day volume weighted average price ending August 9, 2023.
Tapestry comprises iconic accessories and lifestyle brands, including Coach, Kate Spade, and Stuart Weitzman. Capri consists of Versace, Jimmy Choo, and Michael Kors.
The combined company generated global annual sales of over $12 billion with a presence in over 75 countries and achieved nearly $2 billion in adjusted operating profit in the prior fiscal year.
They expect to realize over $200 million in run-rate cost synergies within three years post-closing, supported by operating cost savings and supply chain efficiencies.
Tapestry has secured $8.0 billion in fully committed bridge financing from Bank of America N.A. and Morgan Stanley Senior Funding, Inc.
Tapestry will suspend its share repurchase activity to prioritize de-leveraging via debt reduction.
Telsey Advisory Group analyst Dana Telsey maintained Capri Holdings with a Market Perform and raised the price target from $41 to $57.
Despite the positive Q1 results, CPRI is moderating its annual outlook due to expected challenges in the U.S. wholesale channel and pricing pressures.
Capri reported Q1 FY EPS of $0.74 compared to $1.50 last year, slightly exceeding both consensus estimates of $0.71 and the guided $0.70.
The earnings beat was driven by effective expense control and improved revenue, although the gross margin was lower than expected. Total revenues decreased by 9.6% to $1.23 billion (down 9.3% in constant currency) compared to the market's anticipation of an 11.7% decline to $1.20 billion and the guided ~$1.2 billion.
Among the brands, Jimmy Choo performed well in the quarter, with revenue up 6.4% YoY and a marginal 230-basis-point decline in operating margin.
Michael Kors saw revenue contract by 13.8% YoY and a 780-basis-point decline in operating margin, while Versace's revenue fell 5.8% YoY, and its operating margin fell 1,770 basis points YoY.
Raymond James analyst Rick Patel downgraded Capri Holdings from Strong Buy to Market Perform.
CPRI's valuation is now roughly in line with the historical avg and better reflects CPRI's growth potential. For TPR, the stock's sell-off (down ~16%, despite plans for DD% EPS accretion) reflects uncertainty, as CPRI is a turnaround story, with sales expected to decline in the near term before growing LSD%.
Patel also thinks there are concerns about the increase in debt given the uncertain macro (he believes TPR can handle the debt and work down its leverage ratio, as planned). Given the merits of TPR's long-term growth potential (as stand-alone and pro-forma), we stuck to his Outperform rating.
Price Actions: TPR shares traded higher by 1.38% at $35.15 on the last check Thursday. CPRI shares traded lower by 1.15% at $53.28.