Fashion giant ventures into fast-growing millennial market with new purchase
After countless months of speculation and waiting, Coach announced its purchase of Kate Spade for $2.4bn through a cash only buy out. Shareholders are expected to receive $18.50 which was a 9% premium over the Friday prior. The financial advisor for Coach is Evercore Partners and the financier is Bank of America Merill Lynch. Kate Spade is being advised by Perella Weinberg Partners LP.
The deal represents the continuing trend of increased M&A transactions within the fashion industry, with the number of high profile deals rising to 96, 30% more than 2016. Acquisitions tend to make up the highest proportion of M&A deals in the fashion industry, as larger firms seek to quickly attach themselves to the latest and most innovative trends to differentiate themselves in this highly competitive industry.
Coach Inc, with headquarters in New York, manufactures and retails a variety of clothing items and accessories including handbags, scarves and jewellery. Net income for the latest quarter totalled $122million with earnings per diluted share of $0.43. Kate Spade &Co produces and retails similar produce, with a greater focus on clothing. Net income totalled only $1million with an EPS of $0.01. However, it should be the noted the firm has been significantly expanding, and thus this quarter net income is not a true reflection of its profitability, demonstrated by a much healthier EBITDA of $30m.
The rational for the deal is based on numerous reasons. Firstly, 60 percent of Kate Spade’s client base derives from millennials. Its success with the younger generation stems from the clothing’s more colourful and relaxed look. Coach by contrast has a more even distribution of clientele, therefore Kate Spade’s acquisition could potentially allow for significant revenue synergies through providing greater access to the growing youth market.
Further, Coach’s CFO expects over $50million in cost synergies over the next 3 years thanks to the complementary nature of the business. Luxury and mid-tier fashion cannot afford to discount its price to increase sales, but the newly merged company will greater buying power over suppliers which should generate cost savings. Also, much of the company’s operations overlap in terms of research carried out and stores selling similar products, and thus allow for quantifiable and measurable cost savings. Another potential strategy might be to relocate stores in similar locations to more high growth emerging markets, simultaneously diversifying regional risk and tapping into international clientele.
In terms of determining whether the acquisition was effectively priced, one methodology is to utilise Precedent Transaction analysis. This involves looking at similar M&A transactions and determine an EV/EBITDA multiple and comparing this to Coach’s acquisition of Kate Spade. The reason why Precedent Transaction analysis is particularly useful here is it also considers the premium paid for other fashion M&A deals. According to a Deloitte commission report the Fashion industry had an EV/EBITDA range of 11-15x for 36% of transactions and >15x for another 36% of transactions. The EV/EBITDA for Kate Spade was only 10.4x. According to analysts, combined with Coach CFO’s $50million cost synergy estimation, the deal should be at least 32 cents per share accretive to Coach's fiscal 2020 earnings. Therefore, overall this suggests a highly attractive investment opportunity factoring in both price paid and potential realisation of synergies. A potential issue however in this analysis is that the commission report is a year old, and given the rapidly moving nature of the fashion industry this could potentially mean the data is less relevant.