Kate Spade asks for initial bids, sources say
14 FEB 2017
- Low-teens EBITDA valuation predicted
- Strategic deal could rationalize handbags
Kate Spade & Co [NYSE:KATE] is expected to collect first-round bids later this month, two sources briefed on the situation said.
The sale process for the New York-based handbag and accessories maker and retailer is dominated by strategics with only a few financial sponsors in the mix, these sources said. Some financial sponsors that expressed an interest in the company have not been able to participate in the process, one of the sources said.
By blocking private equity, Kate Spade’s board of directors may be looking to create an aggressive bidding dynamic amongst strategics, but these suitors are unlikely to overpay either, the first source and a sector advisor said.
Kate Spade is likely to be valued at a low-teens EBITDA multiple in a sale, the two sources said. The company already trades at a 10x-11x adjusted EBITDA valuation and a deal is likely to be struck in the 13x EBITDA valuation range, the second source said.
US and European luxury brands Michael Kors [NYSE:KORS], Coach [NYSE:COH], LVMH Moet Hennessy Louis Vuitton, PVH [NYSE:PVH] and VF [NYSE:VF] and Chinese group Li & Fung are all considered logical suitors for Kate Spade.
The sale process for the New York-based handbag and accessories maker and retailer is dominated by strategics with only a few financial sponsors in the mix, these sources said. Some financial sponsors that expressed an interest in the company have not been able to participate in the process, one of the sources said.
By blocking private equity, Kate Spade’s board of directors may be looking to create an aggressive bidding dynamic amongst strategics, but these suitors are unlikely to overpay either, the first source and a sector advisor said.
Kate Spade is likely to be valued at a low-teens EBITDA multiple in a sale, the two sources said. The company already trades at a 10x-11x adjusted EBITDA valuation and a deal is likely to be struck in the 13x EBITDA valuation range, the second source said.
US and European luxury brands Michael Kors [NYSE:KORS], Coach [NYSE:COH], LVMH Moet Hennessy Louis Vuitton, PVH [NYSE:PVH] and VF [NYSE:VF] and Chinese group Li & Fung are all considered logical suitors for Kate Spade.
Kate Spade’s valuation makes it tough for financial sponsors to compete with strategics, the second source said. It is possible that some strategic suitors could look to partner with private equity to bid for Kate Spade to help finance a deal without a buyer needing to tap the capital markets, this source said.
In late December, The Wall Street Journal reported Kate Spade was exploring a sale with advisors. The stock has since jumped over 30%. Perella Weinberg is advising the company on the sale, as reported.
Few financial sponsors are likely to be comfortable with a large retail buyout like Kate Spade, a second sector advisor said. Funds like TPG already own underperforming retailers and would be reluctant to increase their exposure to the sector, this advisor said.
In November, hedge fund Caerus Investors sent a letter to Kate Spade’s board urging it to explore a sale as the company would make a “great” acquisition candidate with its stock trading at a discount to its peers.
In November, hedge fund Caerus Investors sent a letter to Kate Spade’s board urging it to explore a sale as the company would make a “great” acquisition candidate with its stock trading at a discount to its peers.
In January, this news service reported that Caerus has engaged constructively with Kate Spade before and after the fund sent a letter and it was convinced that neither management nor the board would stand in the way of a sale if it was the best path toward value creation.
The company is scheduled to report earnings on 23 February. A spokesperson for Kate Spade declined to comment.
Coach and Michael Kors would benefit from acquiring Kate Spade by gaining a growth platform and the option to easily convert some of their underperforming stores into Kate Spade stores and boost sales, a Kate Spade shareholder said.
Kate Spade, Coach and Michael Kors have a good share of the US handbags market and they fiercely compete on promotions to boost sales, the shareholder said. If Kate Spade was bought by either Coach or Michael Kors, the industry dynamic would be more manageable as a competitor would be eliminated, he said.
The second sector advisor said that with Kors now trading below 5x EBITDA, acquiring Kate Spade could be risky, especially if the public markets do not reward it for doubling down on handbags. There are already concerns that the handbag space is oversaturated and larger players like Kors might be better served by diversifying, this advisor added.
The company is scheduled to report earnings on 23 February. A spokesperson for Kate Spade declined to comment.
Coach and Michael Kors would benefit from acquiring Kate Spade by gaining a growth platform and the option to easily convert some of their underperforming stores into Kate Spade stores and boost sales, a Kate Spade shareholder said.
Kate Spade, Coach and Michael Kors have a good share of the US handbags market and they fiercely compete on promotions to boost sales, the shareholder said. If Kate Spade was bought by either Coach or Michael Kors, the industry dynamic would be more manageable as a competitor would be eliminated, he said.
The second sector advisor said that with Kors now trading below 5x EBITDA, acquiring Kate Spade could be risky, especially if the public markets do not reward it for doubling down on handbags. There are already concerns that the handbag space is oversaturated and larger players like Kors might be better served by diversifying, this advisor added.
The second source, however, said Kors needs a brand like Kate Spade to accelerate its growth as standalone single brands are “a thing of the past.” Acquiring Kate Spade could help Kors capitalize on its built-in infrastructure and extract synergies.
Kors shares plunged earlier this month when it reported a more than 6% decline in same-store sales. CEO John Idol said the company continues to look for acquisitions with a preference for larger deals.
Meanwhile, LVMH does not view US brands as luxury, the first sector advisor said, and it is unlikely to see Kate Spade as an opportunity to own a new true global luxury brand. Christian Dior [EPA:CDI], the luxury goods group, is the main holding company of LVMH, owning 40.9% of its shares and 59.01% of its voting rights.
The second source, however, noted that Kate Spade’s brand appeals to millennials and is a sizeable asset, so even if it does not align perfectly with LVMH’s interest, the France-based luxury brand house could unlock value through a Kate Spade acquisition.
The strategic review of Kate Spade comes as Republicans in Congress debate changes to the US corporate tax code that would reduce the overall tax rate but would also implement a border adjustment tax that could negatively impact large importers.
Kors shares plunged earlier this month when it reported a more than 6% decline in same-store sales. CEO John Idol said the company continues to look for acquisitions with a preference for larger deals.
Meanwhile, LVMH does not view US brands as luxury, the first sector advisor said, and it is unlikely to see Kate Spade as an opportunity to own a new true global luxury brand. Christian Dior [EPA:CDI], the luxury goods group, is the main holding company of LVMH, owning 40.9% of its shares and 59.01% of its voting rights.
The second source, however, noted that Kate Spade’s brand appeals to millennials and is a sizeable asset, so even if it does not align perfectly with LVMH’s interest, the France-based luxury brand house could unlock value through a Kate Spade acquisition.
The strategic review of Kate Spade comes as Republicans in Congress debate changes to the US corporate tax code that would reduce the overall tax rate but would also implement a border adjustment tax that could negatively impact large importers.
The proposal could impact this sale process as strategics may first want to gain greater visibility on the new tax regime, the shareholder said. The second source said that as more information has come out, retailers have become more comfortable with the proposals and stocks have started to go back up. He noted that the border adjustment tax should not be looked at in isolation as other benefits would accrue from the overall comprehensive tax reform.