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Coach Inc. Jumps Today as It Finally Inks Deal With Kate Spade

By Bradley Seth McNew – May 8, 2017 at 12:58PM

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The iconic handbag maker is having a good 2017 so far -- and management is confident that this deal will keep that growth going.

What happened

Shares of the handbag and accessory maker Coach (TPR 0.14%) gained nearly 10% during early-morning trading Monday after the company announced that, after months of speculation and talks that seemed to fall through, it is acquiring the fashion brand Kate Spade (KATE). Kate Spade stock was also up around 8% in early trading.

So what

Coach has agreed to buy Kate Spade for $18.50 per share, or $2.4 billion total, and the deal is expected to close sometime in the third quarter of this year. Kate Spade management reportedly balked at early offers made by Coach, but the boards of both companies have unanimously approved today's announced deal, which represents a nearly 30% premium from where shares of Kate Spade were trading in December -- before buyout speculation was reported.

Coach plans to pay half of the total amount with the pool of excess cash it has been growing in recent years, and the rest through debt. On the rationale for the deal, Coach CEO Victor Luis said in the company's announcement:

Kate Spade has a truly unique and differentiated brand positioning with a broad lifestyle assortment and strong awareness among consumers, especially millennials. Through this acquisition, we will create the first New York-based house of modern luxury lifestyle brands, defined by authentic, distinctive products and fashion innovation.

A woman holds a Coach handbag while leaning against a retro car with a cityscape in the background.

Image source: Coach Inc.

Now what

In addition to creating a company that merges two top brands into one combined entity, management sees $50 million in cost-cutting synergies, while being able to use the combined brands to take more international market share. Coach said in the release that the company plans to preserve Kate Spade's brand independence and retain key talent.

This is the cap of an already very strong start to 2017 for Coach, after the company reported better-than-expected earnings growth in its recent first quarter. During the quarter, Coach saw higher gross margin and grew earnings per share 7%, year over year, despite what Luis said in that release was "a volatile and complex global environment." As of midday trading today, shares of Coach are up 28% year to date, but still down 42% from its March 2012 highs.

Seth McNew has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Coach. The Motley Fool has a disclosure policy.

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