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Coach to Acquire Kate Spade in $2.4 Billion Deal

Coach Inc. announced Monday that it will add Kate Spade to its portfolio of brands, besting rumored rival Michael Kors.

The company will pay $2.4 billion, or $18.50 per share. The long-speculated deal, which is expected to close in the third quarter of 2017, will be funded by $1.2 billion in cash, senior notes and bank term loans.

The deal follows months of speculation, further fueled by Kate Spade’s admission in February that it was exploring strategic alternatives. That development was sparked by one of the handbag company’s investors Caerus Investors, which submitted a letter to the board in November urging it to sell the company because profit margins were lagging behind its rivals’.

Coach Inc., which has successfully repositioned its flagship brand over the last three years, plans to follow a similar course with Kate Spade, including a reduction in wholesale distribution and participation in flash sales. As it has with Coach, the move is expected to decrease profits in the short term but ideally position the label for a profitable future. Coach Inc. anticipates that the losses will be offset by aligning Kate Spade’s back office, inventory management and supply chain with that of the Coach brand.

Victor Luis, chief executive officer of Coach, Inc., credited Kate Spade’s branding and positioning with the coveted millennial consumer. He continued: “In addition, we believe Coach’s extensive experience in opening and operating specialty retail stores globally, and brand building in international markets, can unlock Kate Spade’s largely untapped global growth potential. We are confident that this combination will strengthen our overall platform and provide an additional vehicle for driving long-term, sustainable growth.”

Coach Inc. readied itself for such growth by creating the role of president and CEO of the Coach brand and appointing Joshua Shulman, former president of Bergdorf Goodman and NMG International, to the position. At the time, the company said the new role was an integral step in making Coach Inc. a multi-brand organization. To further that goal, the company also created the role of president of Global Business Development and Strategic Alliances for Coach, Inc. and promoted Ian Bickley to fill it.

Kate Spade joins Stuart Weitzman, which the company acquired in 2015. For the third quarter, ended April 1, net sales and profits at Stuart Weitzman were up in the single digits, and Coach Inc. stated it anticipates double digit sales growth for the fourth quarter and year.

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For Coach Inc., gross margin was up 190 basis points to 70.9% for the quarter though both net sales and gross profits were negatively affected by the company’s move to tighten up wholesale distribution in North America.