The U.S. government currently hates companies merging. The new litmus tests are not just focused on how a merger will affect competition among brands and products for consumers. When Tapestry, Inc. (NYSE: TPR) announced the acquisition of Capri Holdings Limited (NYSE: CPRI) in August-2023 the companies were touting that a combination would be able to compete better against larger luxury bands. And there seemed little fears that the deal would be blocked.
This merger has now seen two attempts to kill the deal. The moves in Capri and Tapestry after Thursday’s deal blockage were both extreme moves versus what some expectations would have suggested. After a near-50% drop in Capri, and after a 13% gain in Tapestry, is there room for strategic investors to get a foot in for upsized gains in either company?
The answer may not be a resounding yes. Nor is there a resounding no answer. And both stocks are now at points where new investors trying to analyze the stocks independently may have more questions than answers.
When it was announced as a $8.5 billion acquisition for Capri in August-2023, Tapestry’s hope was that amalgamating into a luxury and aspirational luxury powerhouse could elevate its brands and appeal to a wider audience for fashion and accessories. The deal would have brought Tapestry’s brands of Coach, Kate Spade and Stuart Weitzman together with Capri’s brands of Michael Kors, Versace and Jimmy Choo.
So, what does this all mean now?
THE MERGER WAS ALREADY IN TROUBLE
The judge’s ruling late on Thursday included the notation that Tapestry and Capri are close competitors and that the merger would follow with “the loss of head-to-head competition” which would ultimately raise prices for consumers. The Federal Trade Commission first moved to block Tapestry’s acquisition of Capri in April-2024.
The FTC’s first deal blockage already pointed to concerns of stifling competition in the affordable luxury handbag market. Now with the second blockage, even with an appeal coming, Wall Street is writing the chances of success down nearly to zero. Not entirely down to a zero percent chance, but nearly.
The moves year-to-date (YTD) and over the last year in each stock should speak volumes. Tapestry’s shares are now up 37% in 2024 alone, and the gain is now 81% from a year ago. Capri’s stock is now down 57.7% YTD and down 58.5% from a year ago.
Even in August of this year, the mergers odds of closing were pegged only at about 30% chance of success by Raymond James.
TAPESTRY’S VALUE RECAPTURE
Friday’s final price reaction added $1.35 billion in market cap to Tapestry as its 13.5% gain to $50.49 ended with a $11.75 billion market cap. Its 52-week range is $25.99 to $51.59.
The analyst community immediately responded with price hikes on Tapestry. There were multiple analyst calls that had been seen on Friday alone:
- Bernstein reiterated its Buy rating with a $60 price target.
- Citigroup reiterated its Buy rating and raised its price target to $55 from $49.
- BofA reiterated its Buy rating and raised its price target to $60 from $52.
- Evercore ISI reiterated its Outperform rating and raised its price target to $63 from $47.
- JPMorgan reiterated its Overweight rating and raised its price target to $66 from $51.
- Wells Fargo reiterated its Overweight rating and raised its price target to $65 from $50.
Just on October 21, only a few days ahead of the FTC block, Goldman Sachs reiterated its Buy rating on Tapestry and raised its target to $52 from $47.
CAPRI’S VALUE DESTRUCTION
Friday’s final price reaction took away almost $4.9 billion in Capri’s market cap as its stock was dealt a crushing 48.9% loss to $21.26.
Capri’s market cap is now down to just $4.9 billion and its 52-week range is now $20.99 to $51.46. Capri’s stock was trading at $41.60 ahead of the news of the judge’s ruling.
Despite such a big drop of 48.9%, traders and investors saw a rather narrow trading band of $20.99 to $23.25 on Friday. This should imply a low conviction that Capri will be able to get its merger back on track. And if so, Capri is going to have to run its Michael Kors, Versace and Jimmy Choo brands on its own.
The analyst community immediately pounced on Capri’s valuations and they are valuing the stock now much closer to the current $21 handle than they are the prior $40+ level with the merger premium baked into the stock. These were the calls that had been seen on Friday alone:
- Capri was maintained as Neutral and its target was slashed to $22 from $57 at JPMorgan.
- Capri was maintained as Market Perform and its target was cut to $26 from $42 at Telsey Advisory.
- Capri was maintained as Equal-Weight but its target was cut to $23 from $42 at Wells Fargo.
On October 17, a week prior to the second block, Wells Fargo had downgraded Capri to Equal-Weight from Overweight and the price target was kept at $42.
Even in mid-September, Citigroup downgraded Capri to Neutral from Buy but the firm kept a $41 price target.
INDEPENDENT VIEWS OF THE POST-BLOCKAGE
There were several research reports from non-brokerage entities ahead of the merger. Not every report can be covered of course, and Oggonomics had an earmark of its own in this deal if it was going to be blocked.
Argus had a Buy rating on Tapestry with a $52 price target as recently as September 13. The firm noted that Tapestry was valued at just 9-times its 2024 earnings estimate and at a discount to peers on price/sales and price/book valuations as well. Its aspirational premium brands were telegraphed as having room to raise its prices into 2025 and to expand its jewelry, footwear and clothing brands.
CFRA issued a report on Tapestry on October 19, a week ahead of the FTC deal block. It had a Buy rating and $50 target. That report said its Buy rating and its price target reflected its view that Tapestry was too cheap to ignore “regardless of if or when the (Capri) acquisition closes.” It even opined that Tapestry was better positioned than most retailers to maintain margins and earnings as the economy slows with a direct-to-consumer channel that makes up about 90% of its sales.
Morningstar had opined ahead of this second deal blockage that the base case was that the merger for Tapestry and Capri would close. The firm had noted that there was little precedent for antitrust action in a competitive accessories and apparel space. As the judge’s ruling strongly rejected all major arguments from the companies, and even with an appeal expected, Morningstar noted that it is now unlikely that the merger can be closed by a February 2025 deadline.
Oggonomics had tried to model some sum-of-the-parts and had pegged the likely value destruction for Capri at 30%/35% on the low-end 40-ish percent on the high-end. With the stock closing down 48% to $21.26 in a day and with such a narrow post-blockage range of only $20.99 to $23.25, this view is that a fair-value is now closer to $23 is a neutral economic footing. If Capri’s Kors, Choo and Versace brands hold up better and the economy doesn’t dip further then the value may be closer to $25 — closer to the lower-end of the implied $25 to $29 range from a 30% to 40% expected drop.
THE APPEAL MAY BE A WASTE OF TIME
After the announcement of the deal’s blockage on Thursday evening, Capri Holdings almost immediately announced that it intends to jointly file with Tapestry an appeal of this merger blockade. The press release said that the appeal is consistent with the requirements of the merger agreement. Based on the reactions of each stock, Wall Street is not exactly buying that the appeal will have much success. And the independent research reports are writing the merger off as well.
Capri’s stock price was $34.61 in August-2023 the day before the merger’s news reaction. Capri’s stock jumped to $53.90 in the immediate reaction to that initial merger announcement. The prevailing thought at that time was that the FTC would likely not have any cares at all about luxury brands and aspirational luxury brands being merged into a larger company. Now the stock is worth almost 40% less than before the formal merger news even broke.
Tapestry’s trading volume of 16.3 million shares on Friday alone (again for a 13.5% gain) was on 5-times its normal trading volume. Capri’s trading volume of 51 million shares for its 48.9% drop was basically 20-times its normal trading volume — and that’s not even counting the 18.2 million shares from the prior day’s volume if you include after-hours trading.
Based on what has been seen, this merger’s chances of success look rather grim at this point. The FTC has made it clear that it is against most mergers going forward, and that means it may turn into a political issue with an election that could bring an entire regime change and attitude change. And with the consumer looking a bit tired or cautious, and with more corporate layoffs expected ahead, it is harder to get excited about challenging any of the newer subdued price targets on Capri.
The new higher price targets on Tapestry seem reasonable based on the $50.49 share price, but that is already after the stock challenged a 52-week high on Friday. Its daily range of $48.50 to $51.58, and closing in the midpoint of that range, after having closed at $44.47 pre-news on Thursday does not bring an expectation for runaway upside here either.
DISCLAIMERS & NOTICES
Oggonomics has highlighted other brokerage research reports and independent reports for formal ratings and for formal price targets. Those ratings and targets are the opinion of each firm named. They do not represent the opinion of Oggonomics.
Oggonomics does not have any formal ratings nor any formal price targets on the companies mentioned in this report. In no way should this be interpreted as investment advice nor is this a recommendation to buy or sell any of the stocks mentioned.
All investing decisions are up to each investor individually. And all investing decisions to buy, sell or hold (or to short or to avoid) should be made with a financial advisor.
