The luxury fashion industry is facing a major change as Tapestry Inc., which owns brands like Coach, Kate Spade, and Stuart Weitzman, plans to buy Capri Holdings Limited, the parent company of Michael Kors, Versace, and Jimmy Choo. This merger, valued at about $8.5 billion, has sparked considerable discussion, especially since the Federal Trade Commission (FTC) is trying to block it due to antitrust concerns. This legal battle could significantly impact not just the brands involved but also the overall competition in the global luxury market.

Acquisition Overview

• Acquiring Company: Tapestry, Inc. (NYSE: TPR)
• Acquired Company: Capri Holdings Limited (NYSE: CPRI)
• Deal Value: Approximately $8.5 billion
• Per Share Price: $57.00 in cash for Capri Holdings shareholders
• Combined Brands: Coach, Kate Spade, Stuart Weitzman, Versace, Jimmy Choo, and Michael Kors.

Reasons for the Merger

Tapestry aims to strengthen its position in the luxury market by combining brands that complement one another. With a joint presence in over 75 countries, the merger is expected to generate more than $12 billion in annual sales.

Complementary Brands

By combining their well-known brands, Tapestry aims to become a major player in the luxury market. Each brand has its unique identity, allowing Tapestry to reach different customer groups. For example, Michael Kors appeals to consumers seeking affordable luxury, while Versace and Jimmy Choo target high-end clientele.

Financial Strength

Financially, Tapestry anticipates nearly $2 billion in adjusted operating profit from the merger. It also expects to achieve over $200 million in cost savings within three years after closing, which is essential for increasing profitability. Tapestry will use its existing consumer engagement platform to improve direct-to-consumer sales, enhancing sales and brand loyalty.

Regulatory Challenges

Despite its potential benefits, the merger faces major obstacles. The FTC’s involvement raises concerns about decreased competition in the accessible luxury handbag market, where products typically range from $100 to $1,000.

In the Courtroom

The courtroom proceedings have revealed insights from industry leaders, including Michael Kors’s admission of brand fatigue and assurances from Tapestry’s CEO that distinct brands like Coach and Kate Spade would maintain separate identities. Both sides assert that consumer preferences are evolving, with modern consumers valuing affordability and variety over traditional brand loyalty.

This shift in consumer behavior challenges the FTC’s argument that the merger would harm competition, as the current market includes a broader range of competitors beyond the established luxury brands.

Antitrust Concerns

The FTC argues that the merger between these fashion giants could lead to higher prices and lower quality for consumers. The case, which is currently being heard in a Manhattan court, is expected to set a key precedent for future mergers in the fashion industry. Closing arguments are scheduled for September 30, and the outcome will greatly impact the future of both companies.

In defense, Tapestry and Capri argue that the handbag market is still very competitive. They claim that Coach and Michael Kors not only compete with other mid-range brands but also face competition from high-end luxury labels and more affordable options.

Joanne Crevoiserat, CEO of Tapestry, states the necessity for growth in a tough market. During the trial, she presented handbags as evidence to highlight each brand’s unique identity. Michael Kors also testified, discussing the difficulties his brand faces in staying relevant as the market becomes more saturated.

The Failing Firm Defense: A Possible Way Out?

Tapestry and Capri may pursue the failing firm defence, arguing that one company struggles financially and would likely exit the market without the merger. This defense necessitates demonstrating that allowing the merger would not harm competition more than if one firm failed and that no other buyers exist who pose less of a threat to competition.

Recently, in a regulatory filing, Tapestry confirmed that both the European Commission and Japan’s Fair Trade Commission have approved their merger under the EU Merger Regulation and the Antimonopoly Act. However, the FTC is still reviewing the deal. Tapestry and Capri argue that their merger would cause less harm to competition than the failure of one of the companies, especially given the recent regulatory flexibility seen in Europe. If they can align with these adaptable approaches, it could improve their chances with the FTC.

The Stakes: Market Domination vs. Consumer Choice

The FTC’s primary concern revolves around whether the merger would diminish competition, potentially leading to higher prices or reduced product quality in the accessible luxury segment. With a combined market share exceeding 50%, Tapestry and Capri could dominate this market segment, directly competing with brands like Coach and Michael Kors. Regulators worry that consolidating these giants might limit consumer choices and stifle market competition.

The Verdict’s Potential Impact

The outcome of this legal battle could redefine the regulatory framework for mergers in luxury and other consumer-driven industries. A decision favoring the FTC could signal stricter antitrust scrutiny on future mergers, potentially influencing investment strategies and market dynamics. Conversely, if the merger is approved, it could pave the way for further consolidation within the industry, empowering U.S. brands to compete more aggressively against European luxury giants like LVMH and Kering.

Significant Outcomes

The results of the Tapestry-Capri merger extend beyond the fashion industry. Under Lina Khan’s leadership, the FTC has adopted a more aggressive stance against major mergers across various sectors, including technology and groceries. How this case is resolved could shape future approaches to acquisitions, affecting not just fashion but multiple industries.

The future of Tapestry and Capri Holdings hinges on the outcome of the regulatory proceedings and the market dynamics that follow. If the merger is approved, Tapestry plans to leverage its expanded portfolio to effectively target the $200+ billion global luxury market, focusing not only on handbags but also on categories like footwear and ready-to-wear apparel.

Conclusion

The merger represents a key moment for the luxury fashion industry. As Tapestry and Capri work through regulatory approvals and market challenges, the results will have significant impacts. Whether the merger goes through or not, it’s clear that the luxury market is at an important turning point.

The decisions made will affect brand competition, consumer choices, and how the luxury fashion industry is structured. As the luxury world waits for the verdict, this case could change how companies consolidate and how regulations are enforced.

In an industry defined by adaptability and innovation, the stakes are high for Tapestry, Capri, and the entire luxury fashion industry. The future will require careful planning, flexibility, and a focus on meeting the changing needs and preferences of consumers. The results of this legal battle could shape not only the future of these brands but also the entire luxury market.

References

Reuters. (2024, April 15). Tapestry merger with Versace owner Capri gets EU, Japan approval. Retrieved from https://www.reuters.com/markets/deals/tapestry-merger-with-versace-owner-capri-gets-eu-japan-approval-2024-04-15/

Glossy. (2024, September). Court day: What the ruling on the Tapestry-Capri deal means for the future of fashion. Retrieved from https://www.glossy.co/fashion/court-day-what-the-ruling-on-the-tapestry-capri-deal-means-for-the-future-of-fashion/

FashionUnited. (2024, April 16). Tapestry and Capri merger gain EU and Japan antitrust approval. Retrieved from https://fashionunited.uk/news/business/tapestry-and-capri-merger-gain-eu-and-japan-antitrust-approval/2024041675144

Capri Holdings. (2023, May 30). Tapestry Inc. announces definitive agreement to acquire Capri Holdings Limited, establishing a powerful global house of iconic luxury and fashion brands. Retrieved from https://www.capriholdings.com/news-releases/news-releases-details/2023/Tapestry-Inc.-Announces-Definitive-Agreement-to-Acquire-Capri-Holdings-Limited-Establishing-a-Powerful-Global-House-of-Iconic-Luxury-and-Fashion-Brands/default.aspx

FTC. (2024, April 15). FTC moves to block Tapestry’s acquisition of Capri. Retrieved from https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-moves-block-tapestrys-acquisition-capri

Financial Times. (2024, September 24). Tapestry-Capri merger legal battle could redefine fashion industry. Retrieved from https://www.ft.com/content/da7c89fb-e3dd-4b2b-a66c-68bcebd0a62a

Financial Times. (2024, September 22). The stakes of the Tapestry and Capri merger. Retrieved from https://www.ft.com/content/890a6c9c-1b09-4554-ade5-653037f3558d