A mega-sized payoff isn't in the bag for Kate Spade & Co.
Investors in the $3 billion accessories maker have been downright manic as speculation builds of an impending takeover by suitors that are reported to include Coach Inc. and Michael Kors Holdings Ltd. Becoming part of a bigger company could cut Kate Spade's costs and boost its below-industry margins.
Kate Spade stock has climbed about 60 percent in three months, well outpacing the almost 4 percent rise in the S&P 500 during that time. The company is now valued at about 10 times its projected 2017 Ebitda, a multiple more in line with LVMH Moet Hennessy Louis Vuitton SE than Michael Kors and also richer than what Coach commands.
Expectations appear to have soared beyond what's realistic. And yet there are some who still harbor hopes of an even bigger premium.
When Caerus Investors, an activist Kate Spade investor, began pushing for a sale last November, it cited a "reasonable" multiple of at least 12 times Ebitda in arguing a 50 percent premium was warranted. That amounted to about $25 per share at the time.
The stock now trades at about $23, but Caerus's estimates have swelled even higher. It told Bloomberg News last month that Kate Spade was worth "in the high $20s or low $30s." Analysts have also bought into the hype. Cowen & Co.'s Oliver Chen is among the most bullish of those followed by Bloomberg, calling for a takeout price of $27 to $30 a share or "potentially higher depending on synergies and competition."
Assessing the value of Kate Spade is made more difficult by the small pool of comparable retail takeovers (which perhaps should tell you something about the risks Coach or Michael Kors would be taking on by trying to integrate a Kate Spade buyout).
For example, a high $20s takeout price makes perfect sense in the context of Samsonite International SA's purchase of luxury luggage maker Tumi last year for $1.7 billion including net cash. Applying the 14.5 times trailing 12-month Ebitda multiple of that transaction to Kate Spade does in fact get you to $27.
But the comparison is hardly bulletproof. In Samsonite's case, there was a motivated, Hong Kong-listed buyer that had been eyeing the brand for years. As such, the Tumi takeover was one of the more expensive deals of its kind over the past decade.
Kate Spade also doesn't carry quite the same high-end reputation as Tumi. The latter company began cutting back on promotional activity in 2014 to protect the premium nature of its brand and to boost margins. Its focus on the upper echelon of wealthy travelers made Tumi worth a lofty price tag. Samsonite's plans to double Tumi's sales to $1 billion with a major marketing push would be unthinkable had the brand been over-commercialized to begin with.
Kate Spade has said it's trying to pull back on discounting, too. But a steady flow of promotional sales, and the fact the brand keeps popping up in less-than-luxury locales such as Bed Bath & Beyond Inc., don't help its case.
Other deal comparisons are less flattering. PVH Corp. paid 10.7 times Ebit for Tommy Hilfiger in 2010 -- a time when expanding relationships with Macy's Inc. department stores was considered a good thing. That deal isn't apples-to-apples, but that multiple applied to Kate Spade would suggest a price below $20 a share.
Alternatively, when PVH agreed to acquire Warnaco Group Inc. in 2012 to reunite the Calvin Klein brand under one roof, it offered about 9 times the company's projected Ebitda for that year, per KDP Investment Advisors. That suggests a valuation of about $21 for Kate Spade.
There are signs the takeover euphoria may be tapering. The consensus analyst recommendation on the stock fell from "buy" to "hold" last week. People are hopefully starting to digest that a sudden revival isn't in the cards for a retail industry in secular decline. Like other brands, Kate Spade has learned the hard way that opening new stores won't help it reach lofty growth targets. It hasn't come close to its goal of $4 billion in annual revenue.
But investors still may be overly optimistic. Kate Spade fell more than 2 percent on Tuesday on reports Michael Kors may have dropped out of the bidding. The stock still traded around $23, however. Without a bidding war, there's a risk any takeover ultimately comes at a discount. And if Coach does pay an additional premium, it should be prepared to face shareholder criticism.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
An auction is still ongoing.
A disproportionate amount of the acquisitions of size in this industry are done by private equity firms, which tend to pay lower valuations because they don't have the same cost-saving opportunities another retailer would.
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Mark Gongloff at email@example.com