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What happened?
The newest American fashion conglomerate is off the cards — pending an appeal. On 24 October, a US judge blocked the Tapestry-Capri merger following an eight-day trial, which ended on 17 September and was followed by closing arguments on 30 September. Capri shares plummeted approximately 45 per cent in after-hours trading following the verdict.
Tapestry and Capri plan to jointly file a notice of appeal to the US Court of Appeals for the Second Circuit, challenging the US District Court for the Southern District of New York’s decision to grant the Federal Trade Commission (FTC)’s motion for a preliminary injunction blocking Tapestry from acquiring Capri.
“Today’s decision granting the FTC’s request for a preliminary injunction is disappointing and, we believe, incorrect on the law and the facts,” Tapestry said in a statement following the verdict.
“Tapestry and Capri operate in an industry that is intensely competitive and dynamic, constantly expanding and highly fragmented among both established players and new entrants. We face competitive pressures from both lower and higher priced products and continue to believe this transaction is pro-competitive and pro-consumer.”
The verdict comes after the Tapestry-Capri merger has sat in limbo for the past year due to opposition from the FTC. The deal was first announced in August 2023, to a relatively positive reception. It was set to close by the end of 2024, but in April, the FTC sued to block the $8.5 billion deal on the grounds that the merger would eliminate competition and give Tapestry and Capri (as one) a dominant share of the ‘accessible handbag’ market by bringing the Coach, Kate Spade, Stuart Weitzman, Michael Kors, Jimmy Choo and Versace brands under one owner.
In August, Tapestry and Capri filed an opposition to the FTC’s motion for a preliminary injunction in the US District Court in the Southern District of New York, ahead of the trial that began on 9 September (the same date as Coach’s New York Fashion Week show).
On 16 September, the penultimate day of the trial, designer Michael Kors testified about the challenges of retaining relevance in a fast-paced, digital world where brand heat hinges on TikTok virality and celebrity pap shots. “I think we’ve reached the point of brand fatigue,” he said.
Why does it matter?
It’s a blow to both Tapestry and Capri’s growth plans, which hinged on the pending deal. In Tapestry’s latest earnings, the company doubled down on its optimism about the merger, unfazed by Capri’s recent underperformance. CEO Joanne Crevoiserat maintained that the merger “remains an incredible strategic fit”.
Now that it’s been blocked, investor confidence is waning — and they are not optimistic that the companies will be able to push the deal through, despite the appeal.
“For Tapestry, the blocked transaction unfortunately puts into question the ability to grow as a platform,” TD Cowen managing director Oliver Chen said in a note following the verdict. “We do not see a high likelihood of Tapestry and Capri’s intended appeal being granted as the appeal would need to argue that the judge’s decision was incorrect in fact or law, which is not a small feat. Additionally, there is added pressure of the February 2025 expiration of the bonds intended for the transaction.”
During Tapestry’s August earnings, CFO Scott Roe said that, given Capri’s valuation, buy-backs are a compelling option (while maintaining that “plan A”, the deal, was Tapestry’s priority). Chen also flagged that Tapestry will need to make an effort to get the deal through to avoid the risk of being sued by Capri.
“We intend to appeal the decision, consistent with our obligations under the merger agreement,” the company said in its statement.
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