| NEW YORK
NEW YORK May 12 Handbag maker Coach Inc’s
US$2.4bn purchase of designer and smaller luxury handbag and
accessories maker Kate Spade & Co, backed by up to US$2.1bn in
bank loans, shows that US retailers are opening their purses to
buy rivals to boost profits, bankers and analysts said.
More mergers and acquisitions designed to bolster
competitiveness would drive up retail M&A lending, after a 66%
drop in 2016 to US$18bn from US$53bn in 2015 as the sector
continues to face stiff challenges from online retailers.
“As more retailers feel pressured to grow revenue and
profitability in a very challenging retail environment, equity
markets remain robust and access to capital remains fairly
cheap, M&A activity will continue and even accelerate,” said
Mickey Chadha, senior credit officer at Moody’s Investors
Coach, which has investment-grade ratings of Baa2 by
Moody’s, BBB by Fitch and BBB- by S&P, was put on alert for a
possible downgrade by Moody’s and Fitch, based on the added debt
it is taking on for the purchase.
Kate Spade’s non-investment grade credit ratings of Ba3 by
Moody's and BB- by S&P could be revised upward after the
acquisition on an improved financial risk profile.
Two days after the announcement of Coach’s acquisition of
Kate Spade, clothing retailer Abercrombie & Fitch Co said it is
in preliminary talks with several companies interested in a
“Reasons (for retail mergers) could range from product and
geographic diversification to adding online capabilities – for
example PetSmart and Chewy or Wal-Mart and Jet.com – to cost
savings to simply taking out a competitor,” Chadha said.
PetSmart Inc, operator of more than 1,500 pet stores, agreed
to buy online pet retailer Chewy Inc in April, and Wal-Mart
Stores Inc purchased e-commerce company Jet.com last August to
boost their online business.
Coach secured a commitment from Bank of America Merrill
Lynch for up to US$2.1bn under a 364-day senior unsecured bridge
term loan facility to finance its Kate Spade buy. Coach has
US$4.5bn of global revenue, according to Moody’s.
Coach plans to put permanent funding in place via an US$800m
six-month loan and a US$300m three-year loan as well as US$1bn
of senior unsecured notes before the merger closes, which is
expected in the third quarter.
WALKING DOWN THE AISLES
Mergers driven by cost savings make sense even for retailers
without immediate financial pressures, amid declining traffic to
brick and mortar stores, and heavy sales promotions as well as
weak teen spending on apparel, according to Moody’s.
Competition in the sector has pulled median secondary bids
for US retail loans lower since the start of the year to 99.1 on
May 11 from 99.9 on January 4, according to Thomson Reuters LPC
data, and could erode further if bankruptcies accelerate,
several bankers said.
“Payless (ShoeSource) filed for bankruptcy protection in
April, J Crew’s term loan is trading in the 60s, and there’s a
lot of concern about mid-level retail stores that are in the
malls in particular,” a senior banker said.
Retail companies looking to bolster e-commerce and overcome
difficult store locations and other issues make strategic
corporate marriages increasingly likely, and could encourage
more investment-grade retailers to snap up junk-rated rivals
following Coach and Kate Spade’s example, according to the
“We’ll see a lot of M&A if there is value in the franchise,
if the name carries panache and interest by customers,” he said.
“Kate Spade is one of those.”
Investors are, however, braced for further bad news from the
retail sector, particularly from apparel retailers in coming
“I don’t think that we’ve really seen the volatility that we
could if the retail sector was to start to experience a decline,
and I think that’s what is going to happen in the sector
sometime this year,” one investor said.
(Additional reporting by Jonathan Schwarzberg)
(Reporting by Lynn Adler and Leela Parker Deo; Editing By Tessa
Walsh and Jon Methven)