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Coach, Kate Spade shares jump on news of $2.4 billion merger

  • Handbag maker Coach announces a deal to acquire its smaller rival, Kate Spade, for $2.4 billion.
  • This is an effort by the brand to make a broader "lifestyle assortment," Coach CEO Victor Luis says.
  • Coach has been trying to reach younger consumers with its product offerings of late, also signing a deal with millennial, celebrity icon Selena Gomez.

In an effort to resonate more with younger consumers, handbag maker Coach is buying its smaller rival, Kate Spade & Co., for $2.4 billion, the companies announced on Monday, putting many M&A rumors to rest.

"Kate Spade has a truly unique and differentiated brand positioning with a broad lifestyle assortment and strong awareness among consumers, especially millennials," Coach CEO Victor Luis said in a statement.

The deal is expected to close in the third quarter of 2017 and add to adjusted earnings in fiscal 2018, Coach added.

Shares of Kate Spade closed more than 8 percent higher Monday following this announcement, while Coach's stock ended the day up almost 5 percent.

" ... this is a sensible deal both in terms of the brand fit and the premium that Coach is paying," GlobalData Retail analyst Neil Saunders said in a statement about the transaction. "Ultimately the aim for Coach is to become a business with a portfolio of distinct and compelling luxury brands. Today's announcement is the solid step on that journey."

Coach has made no secret of its desire to create a global, multi-brand luxury company.

M&A rumors were already stirring last week, when Coach reported better-than-expected earnings. There were reports surfacing that in addition to Kate Spade, Coach was considering an acquisition of luxury shoe manufacturer Jimmy Choo.

Earlier in the year, Kate Spade said it was actively considering strategic alternatives, and JAB Holding, the owner of Jimmy Choo, made a similar announcement about that brand recently.

"Now that Coach is on a clear path to recovery, we believe it is right for the company to explore options for future growth," Saunders had said last week.

"Some of this will come from the core brand which has the potential to become more of a lifestyle destination," Saunders wrote. "However, Coach needs to be conservative in this push, if only to avoid the previous pitfalls of ubiquity. ... This is one of the reasons why the company is exploring options to buy other brands."

Saunders predicted an acquisition of the Kate Spade brand could have a lot of potential for Coach as Kate is "in the early stages of developing its own lifestyle brand and would benefit from Coach's sourcing and distribution expertise, as well as some fresh thinking on the design front."

Coach's latest strategy to cut back on discounting products in the U.S. is finally paying off, as evidenced by the retailer's financials and a stronger bottom line. Making the shift from turnaround mode to growth mode, Coach hopes to boost sales in the coming quarters and better-position its brand in the mind's of shoppers.

As of Monday's close, shares of Coach have risen 12 percent over the past 12 months and are up 27 percent for the year-to-date period. Kate Spade shares are down more than 22 percent over the past year, and down more than 1 percent for the year-to-date period.

—Reuters contributed to this report.