(Bloomberg) -- A federal judge blocked the planned $8.5 billion acquisition by Tapestry Inc., maker of Coach and Kate Spade handbags, of rival Capri Holdings Ltd., sending Capri shares down as much as 56% in postmarket trading.
US District Judge Jennifer Rochon on Thursday froze the deal after concluding it would harm competition in the market for “accessible luxury” handbags. That gives the US Federal Trade Commission time for its own internal trial over the union, a process that could take months and may doom the combination.
“The merging parties are close competitors, such that the merger would result in the loss of head-to-head competition,” the judge said in a 169-page ruling. She found that the acquisition would create a company with a 59% share of the accessible-luxury market.
Capri shares were down more than 46% to $22.32 at 6:32 p.m. in New York in after-market trading, while Tapestry stock was up 14% to $50.65. Tapestry’s takeover bid for Capri was $57.
FTC Victory
The ruling is a major victory for the US antitrust enforcer and FTC Chair Lina Khan, who has tried to sink takeovers deemed anticompetitive in sectors from tech to groceries, with mixed results. The case has been closely watched by hedge funds and other investors betting on whether the judge would allow the merger to proceed.
“Today’s decision is a victory not only for the FTC, but also for consumers across the country seeking access to quality handbags at affordable prices,” Henry Liu, director of the FTC’s Bureau of Competition, said in a statement.
In addition to Coach and Kate Spade, Tapestry owns the Stuart Weitzman label. Capri sells Michael Kors, Versace and Jimmy Choo. The FTC claimed the acquisition, particularly the combination of Coach, Kate Spade and Michael Kors, would hamstring competition. The two companies argued that their brands compete in a broad and robust market.
In a statement, Tapestry called the decision “incorrect on the law and the facts” and said it would appeal. Capri said it would join that appeal.
Tapestry bonds dropped after the ruling, potentially forcing the company to buy back the debt at prices well below trading levels seen earlier this week.
Wall Street Bets
“This is a big and important win for the FTC,” Bloomberg Intelligence analyst Jennifer Rie said, noting that the agency now has more wins than losses when it comes to cases fully litigated under Khan.
Albertsons Cos. shares dropped in the wake of the decision, declining more than 1.4% in postmarket trading. The FTC has sued to block Kroger Co. from buying the company, and a decision is expected later this year in that case.
Many observers of the hearing, including Rie, had predicted the FTC was more likely to lose the Tapestry case, even though much of the evidence was sealed. The market had effectively placed odds of about 60% that the companies would win.
Hedge funds including Millennium Management, Hudson Bay Capital, Pentwater Capital, Citadel Advisors and Balyasny Asset Management had all amassed a sizable chunk of Capri shares by the end of the second quarter, according to data compiled by Bloomberg, and many sent representatives to the hearing. David Einhorn’s Greenlight Capital added its own Capri position, predicting in its second-quarter investor letter that the FTC challenge was likely to be defeated in court.
Rochon ruled that accessible-luxury handbags are a “relevant antitrust market” distinct from mass market and high-end bags. The companies had claimed they operate in an intensely competitive marketplace, with numerous mass market and luxury brands all fighting for consumers’ business. The market definition was key to the ruling. The judge also referred repeatedly in her opinion to internal company documents that contradicted witness testimony.
Middle Ground
The FTC described the market in question as occupying the middle ground between cheaper, mass market handbags, which are often imported from China, and European-made “true luxury brands,” such as Chanel, Louis Vuitton and Hermès, whose bags typically retail for more than $1,000.
In her opinion, Rochon said “accessible-luxury handbags function similarly to mass-market and true-luxury handbags,” saying that a consumer “can carry a wallet, a phone, or a personal item in a Trader Joe’s tote bag just as effectively as in an Hermès Birkin.” She wrote that “functionally similar products may be in separate product markets, depending on the facts of the case,” noting that while Chevrolets and Fords might be interchangeable, Chevrolets and Lamborghinis aren’t.
Rochon, a Joe Biden appointee who took the bench in 2022, heard testimony in September for more than a week in Manhattan federal court. During the hearing, FTC lawyers introduced internal company documents showing Tapestry executives were more focused on competition with Capri in their price range than on other manufacturers.
Rochon frequently referred to the testimony of company witnesses as “self-serving.” She rejected the companies’ claim that the merger would be pro-competition and would revive the flagging fortunes of the Michael Kors brand.
Over the course of the hearing, Capri shares rose from below $35 to more than $42, moving closer to the $57 Tapestry takeover bid and suggesting that investors were getting more optimistic about the deal going through.
The case is Federal Trade Commission v. Tapestry Inc., 24-cv-03109, US District Court, Southern District of New York (Manhattan).
--With assistance from Jeannette Neumann, Leah Nylen and Josyana Joshua.
(Updates with further details and context throughout, starting in fourth paragraph.)
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