Kate Spade Shares Jump on Report Company May Sell Itselfby and
Company has been seen as takeover target for more than 2 years
Caerus sent letter last month saying investors are frustrated
Kate Spade & Co. surged the most in more than five years after Dow Jones reported that the luxury handbag maker -- which had been under pressure from an activist investor -- is working with bankers to explore a sale.
Shareholder Caerus Investors had pushed the company last month to find an acquirer that could help it improve its profit margins. New York-based Kate Spade is now working with an investment bank and has reached out to potential buyers, Dow Jones reported Wednesday, citing people familiar with the matter.
The report indicates that the fashion house is moving forward with a sale that had been a topic of industry speculation for more than two years. The company -- formerly named Fifth & Pacific -- had been seen as an attractive takeover target ever since it sold the Juicy Couture and Lucky brands in 2013 and 2014, leaving Kate Spade as its sole major nameplate. It instead embarked on a plan to become a lifestyle brand selling everything from apparel to home goods, similar to Ralph Lauren Corp., with a goal of quadrupling revenue to $4 billion annually.
Kate Spade would be seeking a buyer at an opportune time, with Coach Inc., Michael Kors Holdings Ltd., Calvin Klein-owner PVH Corp. and Timberland-owner VF Corp. all having said they are looking for acquisitions.
Kate Spade has the potential to reach its sales target and expand its profit margins, meaning it could fetch a price $21 to $23 a share in an acquisition, Betty Chen, an analyst at Mizuho Securities, said in a note Wednesday. That would mark a premium of roughly 45 percent to 60 percent from the shares’ closing price on Tuesday.
“The growth profile coupled with the brand’s unique appeal to millennials and broad-based success across categories ranging from handbags to apparel and jewelry could be attractive to many buyers,” said Chen, who named Coach Inc. as a potential suitor.
Kate Spade shares soared 23 percent to $17.86 at the close in New York, the biggest gain since October 2011. The stock pared its losses for the year and is now little changed, up half a percent.
Emily Garbaccio, a spokeswoman for Kate Spade, declined to confirm or deny the Dow Jones report, saying in an e-mail that the company doesn’t comment “on industry rumors or speculation.”
Caerus Investors founder and Chief Investment Officer Ward Davis said he wasn’t aware of any moves Kate Spade is taking toward a possible sale, though would be supportive of such a process. The New York-based hedge fund company’s engagement with the board “has been constructive,” he said.
Last month, Caerus sent a letter to Kate Spade saying shareholders were “incredibly frustrated” with its performance and that investors would be better off if it was sold to an acquirer who could better manage the business. Caerus has said it first invested in Kate Spade in 2009, when it was owned by parent company Liz Claiborne. It didn’t disclose the size of its stake.
Like competitors Coach and Michael Kors, Kate Spade has been working to reduce its reliance on promotions and sell more products at full price to maintain its brand’s image. The U.S. luxury industry has suffered from falling sales in recent years, caused by a decline in mall traffic and the rise of e-commerce. The industry’s weakness has fueled speculation that major brands have considered combining, rather than fighting it out alone.
Brian Agnew, managing partner at Caerus, sees synergies with Coach and Michael Kors, which have the ability to boost Kate Spade’s margins higher. European luxury companies and other fashion houses such as PVH and VF would also make sense, Davis said.
“It certainly would make the most sense for a strategic buyer who has expertise principally in licensing and in building out the brand more in international markets,” Davis said.
Kate Spade would also be an attractive target for private equity companies as well as Gucci-owner Kering, which wants to lure younger shoppers with more “approachable” price points, Mizuho’s Chen said.