(Bloomberg) -- A court order freezing Tapestry Inc.’s $8.5 billion acquisition of Capri Holdings Ltd. has put the fashion deal in jeopardy, sent shares of Capri into a tailspin and punished funds and merger arbitragers that bet against the ruling.
The court’s decision Thursday temporarily blocking the buyout — a big score for US Federal Trade Commission Chair Lina Khan — caused Capri’s stock to plunge to record lows Friday. The ruling also sparked selling of other companies in deals facing antitrust scrutiny, including Albertsons Cos. and Vizio Holding Corp.
US District Judge Jennifer Rochon halted the deal after concluding it would harm competition in the market for “accessible luxury” handbags. That gives the FTC time for its own internal trial over the proposed combination, a process that could take months and may doom the deal. The ruling was released minutes after the close of trading Thursday on the New York Stock Exchange.
Late in the session Friday, Capri shares were down 49% to $21.15 at 3:23 p.m. Tapestry’s takeover bid is $57. Shares of Tapestry were up 12.4% to $50.00.
Investors are concerned about Capri’s future as a standalone company. The Michael Kors owner has reported increasingly weaker sales since the acquisition was announced last year, and the legal quagmire the deal partners have just entered threatens to further erode revenue and profitability at Capri.
“The whole business has been run to be sold for quite some time,” Morningstar analyst David Swartz said. “They have to go back to square one.”
The two companies said they plan to appeal, in hopes of avoiding the FTC trial. But neither route — an appeal or the agency’s administrative proceeding — is likely to deliver a resolution before the deal’s Feb. 10 expiration date.
A court decision blocking a deal often effectively kills an acquisition because the FTC’s administrative process can take months or even years to render a final decision. The agency’s recent case against Illumina Inc. over its acquisition of the startup Grail, for example, took roughly two years to reach a final decision.
The median time for a case to be decided in the federal appeals court in New York is a little more than a year, according to statistics from the federal judiciary.
The result is a major victory for the FTC’s Khan, who has tried to sink takeovers deemed anticompetitive in sectors from tech to groceries, with mixed results.
Tapestry owns the Coach, Kate Spade and Stuart Weitzman brands. In addition to Michael Kors, Capri sells Versace and Jimmy Choo. The FTC claims the acquisition, particularly the combination of Coach, Kate Spade and Michael Kors, would hamstring competition in the midrange handbag market. The two companies argue that their brands compete in a broad and robust market.
Options for Capri could include selling off Versace and Jimmy Choo to luxury brands, while Michael Kors could be snapped up by a private equity firm, Swartz said.
For Tapestry, the failed deal has removed what some had feared would be a distraction from its efforts to turn Coach into a higher-end and more profitable brand. Still, it temporarily undermines Tapestry’s bid to compete more effectively against European luxury houses and continue to increase revenue.
Many observers, including Bloomberg Intelligence analyst Jennifer Rie, predicted the FTC was more likely than not to lose the case. The market had effectively placed odds of about 60% that the companies would win, even though much of the evidence was sealed.
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.
The exact impact of the ruling on the funds’ positions isn’t yet clear, and some have options in place to hedge their risks.
In her 169-page ruling, the judge said the two companies “are close competitors, such that the merger would result in the loss of head-to-head competition.” Rochon found that the acquisition would create a company with a 59% share of the accessible-luxury market.
Tapestry bonds, issued to fund the Capri acquisition, dropped after the ruling. A requirement that the company redeem the debt at 101 cents on the dollar prompted a swift selloff as investors rushed to lock in current gains.
Tapestry must repay the investors who helped fund the deal if it doesn’t close before the February deadline. It is also required to pay Capri as much as $50 million to reimburse merger expenses if the deal doesn’t obtain regulatory approval.
Rising Shares
Rochon, a Joe Biden appointee who took the bench in 2022, heard testimony in September for more than a week in Manhattan federal court. 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 judge referred repeatedly in her opinion to internal company documents that contradicted witness testimony, which she called “self-serving.” And she rejected the companies’ claim that the merger would be pro-competition and revive the flagging fortunes of the Michael Kors brand.
The case is Federal Trade Commission v. Tapestry Inc., 24-cv-03109, US District Court, Southern District of New York (Manhattan).
--With assistance from Leah Nylen, Chris Dolmetsch and Josyana Joshua.
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