When companies announce a merger, most investors generally believe the deal will create more value. That also means they expect a premium for their stock price. But when mergers fall apart, it can lead to bad things for the investors who remained in the acquisition target. An acquisition of Capri Holdings Limited (NYSE: CPRI) by Tapestry, Inc. (NYSE: TPR) would have created a powerhouse of luxury and premium brands. Too much for regulators, so the deal was ultimately called off.
Now that Capri Holdings has been cut in half since the merger implosion began toward the end of 2024, Wall Street is starting to believe that the stock’s drop may have been an overreaction. Some analysts now see Capri rising handily — maybe even as much as 50% in the value of its Michael Kors, Versace and Jimmy Choo brands.
The daily flow of analyst calls often contains many hidden gems that might get overlooked by investors without the reports being issued. Oggonomics does not have any formal rating or price target on Capri Holdings. The ratings and targets issued in this report are from outside brokerage and research firms.
BMO SEES BIG UPSIDE POTENTIAL
On Monday, January 6, 2025, BMO Capital Markets’ analyst Simeon Siegel raised Capri Holdings to Outperform from Market Perform. Sigel also raised Capri’s price target up to $31 from a prior level of $25.
BMO simply sees that investor sentiment is now too negative and uninterested in the story. The analyst believes Capri shares will rise as its sales, margins and debt pressures turn “less bad” than have been seen. The report called Capri a meaningful and under-appreciated opportunity where the stock’s sentiment will inflect before the fundamentals.
BMO is not alone in the call with Capri’s market cap being only $2.5 billion at the present time. Some strategic investors may have started to lick their chops here for value, but there may still be some risks that not all of the bad news has suddenly vanished.
GUGGENHEIM SHARES UPSIDE VIEWS
In late November, Guggenheim was the first big upgrade. It raised Capri to Buy from Neutral with a $30 price target that is similar to BMO’s rating. At that time, Guggenheim saw the stock’s depressed valuation having diverged from the portfolio’s intrinsic value.
The firm noted that management can take steps to increase the value. And while the Michael Kors brand had deteriorated, the analyst believed it is not beyond repair as Versace and Jimmy Choo brands remain attractive assets.
OTHER FIRMS REMAIN MORE CAUTIOUS
JPMorgan raised its target to $19 from $15 in mid-December, but the firm remained cautious with a Neutral rating.
On December 4, Morningstar issued an updated report on Capri. Capri had previously spent $3.4 billion to purchase Jimmy Choo and Versace to boost 1) its status as a luxury house and 2) to reduce its dependence on Michael Kors. The Kors brand sales peaked at $4.7 billion in 2016, but had fallen down to $3.5 billion in fiscal 2024 after a series of internal and external pressures. With a significant earnings drop expected this year, Morningstar’s opinion was that there is still a chance that Capri will be sold as a whole or in parts in the future. The research firm’s fair value estimate is $50.00 but the firm has a “No Moat” status to protect itself and it has a “Very High” Uncertainty rating.
The bulk of the calls were Neutral and Hold with at-market valuations as of mid-November:
- Baird at $23
- Barclays at $21;
- Citi at $21
- Jefferies at $20
- TD Cowen at $22;
- UBS at $20
- and Wells Fargo at $20.
LOOKING BACKWARD
Oggonomics issued its first 360-degree review of the failed Tapestry/Capri merger just over 60 days ago. The question of whether or not there is room for strategic investors to get a foot in for upsized gains in either company has so far favored Tapestry over Capri. And the current answer may not be a “resounding yes” quite yet, but the “more questions than answers” issue is abating each week as Capri’s stock has been maintaining close to its same level when the deal finally imploded.
Capri has since reinstated John Idol as head of the Kors Brand and named Philippa Newman as the Chief Product Officer to rebuild the Michael Kors brand.
CHANGING INVESTOR EXPECTATIONS
Enough trading volume has been seen in the last sixty days that the non-ETF ownership rotation may have drastically changed. This means that pre-merger expectations have also changed for a larger part of Capri’s shareholder base.
With a stock price closer to $21.50, many new shareholders will be quite happy looking out for a $25 to $30 price target in any new merger or in a longer-term value recapture proposition.
Capri was at $35 before the merger was announced in mid-2023, so the post-merger peak just above $50 should no longer be representative in present expectations.
AND THE “Strategic” VIEW…
Expecting a rapid turnaround at this point is likely an unreasonable expectation. Expecting that Michael Kors may choose to evaluate the sale of one of its other two core brands may be something else entirely. The value of the entirety is currently less than the value Kors paid to diversify — and that strategy has, at least so far, failed to materialize as a higher value creation.
The one issue that every investor should probably keep as an assumption is that Capri’s sales over the holidays may come in lighter than expected. If the sales were gangbuster, maybe the merger chances would have been stronger for Tapestry to fight to wait out the regulators with a new administration coming in Washington, D.C.
And to prove the deal termination was better for Tapestry than Capri, Tapestry was a $47 stock at the start of November — now it’s at $67!
