The Wall Street Journal reports that Tapestry, the owner of the Coach, Kate Spade and Stuart Weitzman brands, is in talks to take over Capri Holdings, the owner of the Michael Kors, Versace and Jimmy Choo brands.
The deal would be one of the biggest fashion deals ever. The combination would create a company that, based on current values, would be worth almost $15 billion (before a deal premium) with EBITDA (earnings before interest, taxes, depreciation and amortization) of over $2.5 billion.
Why would the deal make sense? The theory is that if owning three huge brands is smart and efficient, owning six or more is even smarter and better. What’s more, Euro giants like Kering and LVMH have been gobbling up high end brands for years and in order to compete, American brands need to get together in one big conglomerate.
It may not be that simple, for two reasons:
First, there’s the difference between the Euro giants LVMH and Kering and these two U.S. giants. The American companies like to think that their brands are as high end as the European brands but that’s not how consumers see them. The American brands, especially Michael Kors, have grown in an important measure by creating lower-priced products and expanding to new audiences that can’t afford their highest-price products.
The European brands don’t do that. They maintain their price points and remain more aspirational than their American cousins. That has allowed them to avoid margin pressure and brand dilution. It’s not clear that the American way of growth will allow the brands to maintain their market positions as they grow. The world is filled with brands that previously sold handbags for thousands and now have no presence in the market.
Second, there’s history. Two companies used to be a powerful force on department store floors with fashion brands: Jones New York and Liz Claiborne. Both companies bought many other brands under the theory that efficiency would allow them greater profitability and more power at the negotiating table with their retail customers. For a lot of reasons, it didn’t work very well and the brands they own wound up getting sold or shutting down. (In fact, the Kate Spade brand, now owned by Coach parent Tapestry, was first bought from the founder by Liz Claiborne.)
What will happen to a combination of Coach and Tapestry and all those high-end brands? Will they be able to build all their brands, as LVMH and Kering have or will they go the way or Liz Claiborne and Jones New York’s acquisitions of numerous brands? The deal combining these two giants may be announced today and if it is, it will be months before the closing and years before a verdict.
But history is not kind to the rollups of fashion brands in America. So far, this looks more like other American rollups and less like Kering and LVMH. Time will tell.
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