Burberry has led the so-called "see now, buy now trend," where clothes are sold straight off the runway. But it's not just the company's pirate jackets and pajama suits buyers are after.
The stock rose as much as 8 percent on Friday after financial blog Betaville reported Coach was considering a merger with the British luxury brand.
It's an old chestnut, and the idea first surfaced more than five years ago. A Reuters report on Friday dismissed the idea, and analysts were skeptical too. But as Burberry reels from a management shakeup and stagnant sales, it's a good time to pay some attention to a possible deal -- and whether it would usher in an even larger consolidation among luxury goods makers.
Luxury does well when folks feel happy. This year's political turmoil, currency swings and economic turbulence have prompted high-spending customers to close their wallets. Weakened sales and stock prices are catnip for cash-rich dealmakers, though. We've seen this with tie-ups like Samsonite's purchase of Tumi and Estee Lauder's acquisition of By Kilian. And if there's any truth to the speculation around companies like Burberry, Ferragamo, Michael Kors, and Canada Goose, there could be more deals coming.
Unlike many luxury brands, including Hermes, Chanel and Prada, Burberry is unencumbered by a family shareholding. The shares are up 30 percent since their mid-June low. Luckily for Coach or any other overseas suitor, the pound has dropped by 17 percent since Britian's vote to leave the European Union, alleviating some of the pain from the share price appreciation.
Coach has a market capitalization of about $10 billion, while Burberry's is $8 billion. Add in a takeover premium, and they are more similarly valued. Coach has about $1.3 billion in cash and cash equivalents -- and a pretty low debt load. Coach would likely have to borrow more: To ensure an accretive deal, Coach's offer would likely have to be half-stock and half-cash.
It's a good time for Coach to seek out deals. It's reversed a years-long sales slump and is successfully moving up-market to gain cachet as a sought-after luxury brand. It's learned its lessons from years of overexposure and over-expansion and is starting to gain the upper hand with department stores to limit gratuitous discounting. It also has a good track record of smart acquisitions, including its 2015 purchase of shoemaker Stuart Weitzman.
Fresh from the experience itself, Coach could teach Burberry a thing or two about how to revamp a brand with new creative blood, higher-quality products, and on-point marketing. A combined group might also have more muscle to negotiate with U.S. department stores, helping shore up Burberry's weak wholesale business, and help introduce Burberry to a generation of millennial shoppers who don't have the same kind of brand loyalty as their parents.
This would have to be a delicate operation. A decade ago, Burberry suffered from overexposed products, hence its relentless drive upmarket. It would need to avoid such brand damage once more -- but Coach's recent track record indicates it might just be able to help Burberry pull this off.
Burberry's new CEO Marco Gobbetti won't take up the job until next year, a hiatus that could make it difficult for the British company to defend itself from a predator. After Gobbetti starts, investors may want to give him time to outline his plans to generate greater shareholder value.
Regardless of whether the Coach goes ahead, the interest -- and sterling's slump -- could put Burberry in play. Industry giants LVMH and Kering have long been mooted as potential predators, although even for them Burberry would be a big bite. And as fellow Gadfly Chris Hughes has argued, Burberry could also be ripe for an activist investor.
Even if a predator doesn't buy now, it might buy later.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the editor responsible for this story:
Edward Evans at firstname.lastname@example.org