The Federal Trade Commission succeeded in its effort to hit pause on Tapestry Inc.’s $8.5 billion acquisition of Capri Holdings with a preliminary injunction — likely sinking the mega acquisition.
The reaction was immediate and sharp.
Shares of Capri dropped 47.1 percent to $22 in after-hours trading — a world away from the $57 buyout price it agreed to with Tapestry.
On the other side, shares of Tapestry gained 10.9 percent to $49.31, likely with investors breathing a sigh of relief given how much Capri’s Michael Kors business has weakened since the deal was first signed in August 2023.
The acquisition would have put Tapestry’s Coach, Kate Spade and Stuart Weitzman together with Capri’s Michael Kors, Versace and Jimmy Choo, but that now feels like a distant prospect.
Fashion attorneys felt the legal landscape shift under their feet.
“I’m truly gobsmacked,” said Douglas Hand, an attorney with Hand Baldachin & Associates, who has a long list of designer clients.
“The FTC claims Kate Spade, Coach and Michael Kors compete head to head in a market distinct from LVMH [Moët Hennessy Louis Vuitton], Kering and others — ‘affordable luxury handbags,’” Hand said. “Considering that as the relevant market is flawed. There are competitors for fashion accessories from Gucci and Louis Vuitton to Zara and Lululemon. And there was no consideration given to the massively growing resale market, which of course would include Kors, Coach and other bags.
“A lot of brands considering making acquisitions should be concerned about a [Hart-Scott-Rodino antitrust] filing — particularly conglomerates,” he said. “It makes one wonder how LVMH, Kering and Richmont [Financière Richemont] have been able to operate unfettered in the U.S.?”
Susan Scafidi, founder and director of Fordham Law School’s Fashion Law Institute, said the first sentence of Judge Jennifer Rochon’s ruling said it all — “Antitrust has come into fashion.”
Over an eight-day hearing last month, the FTC argued that if the deal were to go through, Tapestry, with Coach, Kate Spade and Michael Kors, would dominate the “accessible luxury” market and be able to raise prices by 17 percent, with a $365 million annual impact on consumers.
In granting the injunction, Scafidi said the court agreed with the argument, but added that the “conclusion seems at odds with the vagaries of fashion trends and the difficulty of predicting consumer demand in fashion.”
“Whatever the ultimate result for Tapestry and Capri, it seems that the possibility of creating an American LVMH is now as remote as bipartisan unity after the coming election,” she said.
While the injunction can be appealed, such rulings are only rarely overturned. Technically, the deal is only on hold pending a full trial, but experts said a trial would delay the process long enough that the contract governing the deal would expire and the acquisition would be dropped.
In a statement, Tapestry said: “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 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. We intend to appeal the decision, consistent with our obligations under the merger agreement.”
Now dealmakers are going to have to think about how they go about empire-building all the more carefully.
“It is going to be hard to create a U.S. version of LVMH or Kering,” said attorney Jonathan Lazarow, founding member and co-chair of Ambrose, Mills & Lazarow’s Corporate Group. “More broadly, roll-up strategies will still work in highly fragmented disparate markets and regions. However, if the companies command a large national presence, it will be more difficult to utilize a roll-up strategy as part of a growth strategy. Small business, lower middle-market businesses, this may still work. However, large, established businesses will have to be thoughtful on what they are creating, how they are creating the business, and the purpose of the deal.”
The FTC has not stepped into a fashion deal for a generation or more, but has now made its stand.
Nicole Lindquist, who presented the FTC’s opening arguments in September, said: “This case is about the working and middle-class American woman. These women go to the outlet or Macy’s looking for their favorite American brand. She’s looking for something nice…that’s not going to break the bank.”
Half of the consumers buying Coach and Michael Kors bags come from households with annual incomes of less than $70,000, Lindquist said.
“When the biggest, closest competitors merge, that’s bad for American consumers,” she said.
The two companies would have complemented each other, with Tapestry’s abilities to use data to connect with consumers meshing well with Capri, which in turn has a stronger business abroad.
But it was the Michael Kors brand that was really central to the acquisition. Tapestry successfully turned around the Coach brand and was keen to bring its playbook to Michael Kors (although it has been trying to reinvigorate Kate Spade for some time and has thus far fallen short).
Tapestry’s attorneys pushed back against the government’s arguments, saying that even if the brands were under one roof, they would still face stiff competition from luxury brands above and mass market players below.
Now it seems Tapestry and Capri are going to face that competition on their own.
Tapestry is seen in a relatively strong position, but Capri, which is led by chief executive officer John Idol, has been steadily weakening. Even before the deal with Tapestry, Idol was fielding interest from companies that wanted to buy Versace.
Those inbound calls could now start again.
“The ruling leaves Capri very exposed,” said Neil Saunders, managing director of GlobalData. “The company is in poor shape and, in betting on being acquired, has neglected the hard work that needs to be done to course correct many of its weak brands. It will now either need to find another party to buy it — and this is not likely to be at the same premium Tapestry was willing to pay — or it will have to embark on a major program of change.”
