Tapestry/Capri: road to US luxury brand is not paved with gold

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Americans are avid consumers of shiny, expensive things. They make up a huge proportion of global luxury sales. Yet the country has never managed to nurture a luxury fashion conglomerate that can match the prestige of French groups like LVMH, Kering or Hermès. 

Tapestry, the company behind Coach, Kate Spade and Stuart Weitzman, is making a multibillion-dollar bet that it can change that. The New York fashion company is buying Capri Holdings, home to Versace, Jimmy Choo and Michael Kors, for $8.5bn including debt. Tapestry’s management said the “transformational” deal would create a US luxury powerhouse with combined revenues of more than $12bn across more than 75 countries.

The numbers tell a different story. Tapestry is taking on significant debt to acquire a company in which Michael Kors — a struggling and not particularly prestigious brand — generates about 70 per cent of group revenue. Versace, the only true high-end brand in Capri’s portfolio, accounts for just a fifth.

Tapestry’s $57 a share cash offer represents a 55 per cent premium to Capri’s undisturbed three-month average share price. The 40 per cent drop in Capri’s stock this year may make this seem prudent. But Tapestry is paying about seven times ebitda for the business. This is above the six times multiple that its own shares are trading on. Even the $200mn of cost saving synergies being touted, taxed and capitalised, will not cover the premium it is paying.

Critically, the deal also means that Tapestry’s net debt to ebitda ratio will jump to 4.5 times from the current one times, according to Bernstein. It plans to suspend its share buyback to help deleverage the balance sheet. The 13 per cent drop in Tapestry shares illustrates investor displeasure.

Capri offers geographical diversification. But Tapestry does not have a great M&A record. It purchased Kate Spade just before the brand fell out of favour and it has struggled to expand Stuart Weitzman. The dream of a homegrown US luxury empire remains elusive.