Tapestry Inc. and Capri Holdings came into the year arm-in-arm, ready to create an American fashion giant with six brands and some $12 billion in sales.
But the marriage — which would have had Tapestry buy Capri at an enterprise value of $8.5 billion — was star-crossed and not to be.
For the first time in more than a generation, the Federal Trade Commission stepped into a fashion deal and sued to stop the buyout on the grounds that it would give Tapestry control of more than 58 percent of the accessible luxury handbag market.
Tapestry already owns Coach and Kate Spade. If it were to buy Capri and pick up Michael Kors, too, the FTC argued that the company would be able to raise prices by 17 percent just by virtue of its size, saddling customers with $365 million in additional annual costs.
“This case is about the working and middle-class American woman,” claimed Nicole Lindquist, who presented the FTC’s opening arguments in Manhattan federal court in September. “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.”
Lindquist said half of the people buying Coach and Michael Kors bags come from households with annual incomes of less than $70,000. And many of them are spending only so much on a handbag as the average out-the-door price for a Michael Kors handbag was $92 last year.
“When the biggest, closest competitors merge, that’s bad for American consumers,” she argued.
Judge Jennifer Rochon agreed and her ruling in October started with a simple statement: “Antitrust has come into fashion.”
Throughout the hearing that led to that ruling, executives from Tapestry and Capri as well as industry experts argued that the case misunderstood the dynamics in fashion.
Fiona Scott Morton, a Yale professor and former chief economist of the Justice Department’s antitrust division, acted as an expert witness for the companies and described competition in fashion like this: “I think of it as a school of fish, there are hundreds or thousands of them and they’re all trying to follow these trends — zip, zip.”
But the court focused on a few big fish and saw them taking over the fish bowl.
Douglas Hand, a fashion savvy attorney with Hand Baldachin & Associates, said he was “gobsmacked” by the ruling.
“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 Richemont [Compagnie Financière Richemont] have been able to operate unfettered in the U.S.?”
The successful challenge to the potential acquisition gave more than a few dealmakers pause in fashion. It also added to the body of case law that will be relied on in future cases.
But it’s not clear how long any hesitancy will last as President-elect Donald Trump said last week he would nominate Andrew Ferguson to succeed Lina Khan as chair of the FTC, signaling what many saw as a lighter regulatory touch outside of big tech.
The same deal cut today might have passed the Trump administration’s bar.
But now Tapestry has moved on.
It was an expensive adventure that ultimately will have weighed the company down with more than $450 million in pretax costs, including interest expense on debt raised but never used, as well as bankers, lawyers and Capri’s costs.
Otherwise, Tapestry is charging forward, building on Coach’s relative strength, working to turn around Kate Spade and buying back stock. It is also said to be considering a sale of Stuart Weitzman.
Capri is in a much tougher spot.
The company was stuck in a kind of limbo waiting for the deal to close and the already-troubled Michael Kors business suffered, with revenues falling 15.2 percent to $1.4 billion in the first half. The FTC challenge shined an unflattering spotlight on the brand, with Tapestry claiming the deal needed to go through so it could revitalize “this once great American fashion brand” and Capri executives detailing how far it had fallen out of fashion.
Elsewhere in the Capri portfolio, Versace saw revenues fall 22.1 percent to $420 million in the first half while Jimmy Choo held up better, slipping just 0.6 percent to $313 million.
That performance has fashion dealmakers wondering what comes next.
Sources told WWD last week that Capri is working with Barclays to try to find buyers for Versace and Jimmy Choo. And Michael Kors is seen as a brand that might benefit from a turnaround away from the public market.
But in the meantime, John Idol, Capri’s chief executive officer and chairman, has gone into overdrive and is overseeing changes at Michael Kors personally.
Idol acknowledged last month that the Michael Kors business “attempted to elevate price points too quickly over the last two years” while “injecting too much fashion for our core consumer.”
The brand is now increasing its marketing spending and looking to rebuild its core while closing roughly 75 of its 755 stores over the next two years as it looks to build for a future away from Coach and Kate Spade, which would have been its corporate siblings at Tapestry.
