Coach Inc. finally put its money where its mouth is. Now, it has to make sure its investment pays off.
After many months of hemming and hawing, Coach announced a $2.4 billion deal Monday to buy handbag-and-accessories maker Kate Spade Inc. Coach and Kate Spade shares rose 6 percent and 8 percent, respectively.
Coach's patience helped it snag Kate Spade for $18.50 a share -- well below the $25 to $30 a share some overly bullish observers had expected and near the stock's 200-day moving average.
Meanwhile, Kate Spade's board can rightfully claim it got a 27.5 percent premium to the stock's trading level before reports of deal talks surfaced last December.
But getting this deal done was actually the easy part for Coach. It still must revive its core brand and make more deals to help realize its ambition to mimic big European fashion conglomerates such as LVMH Moet Hennessy Louis Vuitton SE.
To that end, it's worth noting Kate Spade is not some hot, new company -- its sales actually fell in the latest quarter from the year before.
And there's not a lot of synergies gained by merging the companies. Coach said Monday it aims to wring $50 million in cost savings over the next three years by improving Kate Spade's manufacturing capabilities and supply chain. Other than that, Kate Spade will operate independently, with its own design and marketing staff. Coach also said any real-estate opportunities from the deal were minimal.
Coach will be able to help expand Kate Spade into Europe and Asia, where a growing middle class is just learning about the brand. Coach's revenue from outside North America soared to 40 percent of total sales this year, from 25 percent a decade ago, and Coach could help do the same for Kate Spade.
And the combined companies will also help give Kate Spade more bargaining power with department stores and mall owners as it tries to wean shoppers off discounts and brand-deteriorating outlet sales.
The key for Coach will be whether executives can devote the necessary time and attention to Kate Spade, while keeping the wheels turning at its core Coach brand, as well as Stuart Weitzman -- all while maintaining the financial discipline and cash flow to keep buying brands such as Jimmy Choo Plc, which is still up for sale and also rumored to be a Coach target. Otherwise, shareholders will have some serious buyers' remorse.
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