Kate Spade Sans Juicy and Lucky Seen as Target: Real M&A

Kate Spade, the fashion label owned by Fifth & Pacific Cos. (FNP), may become the next must-have accessory for acquirers in the retail industry.

Fifth & Pacific agreed in October to sell the intellectual property of Juicy Couture and has also drawn interest for Lucky Brand. After a sale of the units, Kate Spade would be the company’s primary brand and may lure takeover interest from buyout firms or other retailers, SunTrust Banks Inc. said. Coach Inc. (COH) would be a logical bidder for the maker of designer handbags, said Wedbush Inc.

Kate Spade’s same-store sales, including online, have risen more than 20 percent for 12 straight quarters, according to data compiled by Bloomberg. Private-equity firms may be drawn to the brand because it still has room to expand in the U.S. and internationally, said Brean Capital LLC. It could fetch more than Fifth & Pacific’s current $4 billion market value in a sale, according to Sterne Agee Group Inc.

Kate Spade, without Lucky and Juicy, is “a much cleaner story,” Corinna Freedman, a New York-based analyst at Wedbush, said in a phone interview. “There’s a large swath of potential suitors.”

Jane Randel, a spokeswoman for New York-based Fifth & Pacific, had no comment when asked about the sale process for Lucky and the potential for a sale of Kate Spade or the entire company.

Photographer: Daniel Acker/Bloomberg News.

Fifth & Pacific agreed in October to sell the intellectual property of Juicy Couture and has also drawn interest for Lucky Brand. Close

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Photographer: Daniel Acker/Bloomberg News.

Fifth & Pacific agreed in October to sell the intellectual property of Juicy Couture and has also drawn interest for Lucky Brand.

Whittling Down

Fifth & Pacific, formerly Liz Claiborne Inc., changed its name last year after selling its namesake brand to J.C. Penney Co. Fifth & Pacific Chief Executive Officer William McComb has trimmed the company’s portfolio from more than 30 brands when he started in 2006 to just four in 2013: Juicy Couture, Lucky Brand, Kate Spade and the Adelington Design Group jewelry line.

In October, Fifth & Pacific agreed to sell the intellectual property of Juicy Couture to Authentic Brands Group LLC for $195 million. The Lucky Brand label also has attracted interest from suitors, people with knowledge of the matter said in April.

The Wall Street Journal reported yesterday that Golden Gate Capital, Lion Capital LLP, Marlin Equity Partners and Authentic Brands are in the running to buy Lucky Brand. The newspaper cited unnamed people familiar with the matter. Bids for Lucky were due last week and a deal with one of the firms could be reached any day, the paper reported.

Fifth & Pacific said in its earnings statement on Nov. 7 that it wasn’t prepared to comment on decisions regarding Lucky.

With Lucky sold, suitors could set their sights on the faster-growing Kate Spade brand, said Pamela Quintiliano, a New York-based analyst at SunTrust. During the first nine months of this year, same-store sales including e-commerce for Juicy fell 2.8 percent, while Lucky rose 1.2 percent. Kate Spade sales increased 27 percent during that time.

Growth Potential

“If Lucky was so great, they wouldn’t want to get rid of it,” Quintiliano said in a phone interview. “It’s not awful but it doesn’t have the growth potential that Kate has.”

A takeover by another retailer may be more likely, with bidders lured by Kate Spade’s niche in high-end goods, Quintiliano said. While Coach is likely preoccupied with its own turnaround efforts, the company would benefit from acquiring a lifestyle brand such as Kate Spade, said Wedbush’s Freedman.

Andrea Shaw Resnick, a spokeswoman for New York-based Coach, said the company doesn’t comment on speculation, when asked whether it would be interested in acquiring Kate Spade.

Private-equity suitors could be lured to Kate Spade by the chance to accelerate the brand’s expansion in the U.S. and abroad, said Eric Beder of Brean Capital. Kate Spade’s U.S. specialty stores, which totaled 107 at the end of the third quarter, could be doubled, and there are also opportunities to bolster its presence in Europe and Asia, he said.

Ramping Up

“You could take Kate Spade private and then use the additional capital that someone can bring to grow it much quicker than you could grow as a standalone company,” the New York-based analyst said in a phone interview. “There aren’t many consumer growth stories out there so if you’re going to really ramp up the growth and then take it public, you would definitely have a strong demand for it.”

After a sale of Lucky, suitors for Kate Spade would need to be willing to bid for the entire remaining company, which means taking on the Adelington jewelry line as well, said Marino Marin, a managing director in MLV & Co.’s investment banking group and a managing principal in the firm’s proprietary investment arm.

“If you want to own Kate Spade, you’ve got to take the whole Fifth & Pacific, it seems to me,” Marin said in a phone interview.

Rising Price

Adelington would bring in about 15 percent of Fifth & Pacific’s remaining revenue after the sale of Lucky, based on the $83 million in sales the unit had last year. Kate Spade, which generated $462 million in sales in 2012, would account for the rest.

Fifth & Pacific could decide to sell Adelington and focus on just Kate Spade as a public company, a strategy which may ultimately unlock more value for shareholders, Mary Ross Gilbert, a Los Angeles-based managing director at Imperial Capital LLC, said in a phone interview. Fifth & Pacific shares have already climbed 163 percent this year amid shareholder optimism that it would sell Juicy and Lucky.

Today, Fifth & Pacific shares rose 1.3 percent to $33.17.

The rising stock price means that buyers seeking to get their hands on Kate Spade are facing a steeper price tag than if they had bought the company earlier in the year and sold off Juicy and Lucky themselves, said Ike Boruchow, a New York-based analyst at Sterne Agee.

Boruchow estimates that Kate Spade could command about $4.4 billion in a takeover -- more than Fifth & Pacific’s market capitalization of $4 billion yesterday, with Lucky still part of the company.

Kate Spade “is the No. 1 growth story around,” Boruchow said in a phone interview. “It would just be very expensive.”

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net

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