FTC sues to block Capri Holdings $8.5B sale to Tapestry

The Federal Trade Commission filed a lawsuit to block Capri Holdings (NYSE:CPRI) $8.5 billion sale to Tapestry (NYSE:TPR), saying the deal would eliminate competition between Coach, Kate Spade, and Michael Kors.

The Commission issued an administrative complaint and authorized a lawsuit in federal court to block the proposed acquisition, alleging that Tapestry’s acquisition of Capri will eliminate fierce competition between the two companies, the regulator said in a statement on Monday.

The Capri/Tapestry deal received a request for more information from the FTC in November. Last Monday the European Commission approved the Capri (CPRI) deal. The transaction also received approval from Japan's antitrust regulator earlier this month.

“With the goal to become a serial acquirer, Tapestry seeks to acquire Capri to further entrench its stronghold in the fashion industry,” Henry Liu, Director of the FTC’s Bureau of Competition, said in the statement. “This deal threatens to deprive consumers of the competition for affordable handbags, while hourly workers stand to lose the benefits of higher wages and more favorable workplace conditions.”

Tapestry (TPR) quickly responded to the lawsuit.

“There is no question that this is a pro-competitive, pro-consumer deal and that the FTC fundamentally misunderstands both the marketplace and the way in which consumers shop," Tapestry said in a statement on Monday. "Tapestry and Capri operate in an intensely competitive and highly fragmented industry alongside hundreds of rival brands, including both established players and new entrants."

Capri (CPRI) separately respond to the lawsuit.

“Capri Holdings strongly disagrees with the FTC’s decision," the company said in a statement. "The market realities, which the government’s challenge ignores, overwhelmingly demonstrate that this transaction will not limit, reduce, or constrain competition."

The Commission vote to issue the administrative complaint and authorize staff to seek a temporary restraining order and a preliminary injunction was 5-0. Commissioner Melissa Holyoak voted yes because she has reason to believe that the merger "will eliminate substantial head-to-head competition between the parties."

News of the lawsuit wasn't a surprise to investors after several media outlets reported last week that the FTC was preparing a lawsuit to block the deal and the FTC scheduled a closed-door meeting for earlier today, where it was believed the regulators would vote on the transaction.

Shares of Capri (CPRI) and Tapestry (TPR) ticked up slightly on confirmation of the lawsuit in after-hours trading on Monday. Capri shares on Monday closed near their lowest level since the deal was announced in August.

Tapestry (TPR) in early August struck a deal to acquire Capri (CPRI) for $57.00 per share in cash. The deal will combine Coach, Kate Spade, and Stuart Weitzman together with Versace, Jimmy Choo, and Michael Kors.

A TD Cowen analyst on Wednesday wrote that Capri (CPRI) may see downside in the "high-teens" to low $20s a share if its planned sale to Tapestry (TPR) were to be terminated. TD Cowen still believes that there's an above 50% likelihood that the deal closes, which is more "constructive" than the implied 40-50%.

Tapestry (TPR) reiterated in its statement what CEO Joanne Crevoiserat said last week, that the handbag maker expects to close the deal by the end of the year.

"We have strong legal arguments in defense of this transaction and look forward to presenting them in court and working expeditiously to close the transaction in calendar year 2024," Tapestry added in its response.