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NEW YORK (Reuters Breakingviews) - Coach is paying luxury prices to catch up with the Europeans. The U.S. handbag maker is plunking down $2.4 billion for rival Kate Spade, a figure not justified strictly by the numbers. But Coach's owners like the $13 billion company’s move to a multibrand portfolio, which has worked for industry leaders LVMH and Kering. Mature luxury marques can no longer expect to succeed on their own.
Monday's deal represents a 27.5 percent premium on Kate Spade's undisturbed share price, or about $515 million. Coach is only promising to cut $50 million in costs, mainly from supply-chain savings rather than store closures, according to Chief Executive Victor Luis. Taxed and capitalized these are worth about $320 million today, suggesting Coach is overpaying by around $200 million.
But while the deal math doesn't quite add up, Coach's investors boosted its share price some 6 percent, an indication they trust an acquisition strategy like the one Gucci parent Kering and French handbag-to-champagne conglomerate LVMH have successfully pioneered. Despite a 1 percent contraction in the luxury sector globally in 2016, according to Bain, LVMH shares have soared 61 percent and Kering has doubled over the past year. Compare that to single-brand companies: Michael Kors is down 25 percent, Italy's Tod's is up 8 percent and Burberry has gained 37 percent.
This suggests that holding a diverse portfolio of brands works well in a sector particularly sensitive to geopolitical, travel and currency shifts. But given the market is also contracting thanks to slowing GDP growth in China and President Xi Jinping's crackdown on corruption, it also means that Kering and LVMH are expanding their slices of the profit pie.
Coach is far from becoming America's answer to LVMH. Kate Spade sells mid-range luxury handbags primarily to Americans, much as Coach does. Spade may help gain access to millennial shoppers, but the brand remains relatively unknown in Asia. The success of this transaction is also contingent on Coach implementing the turnaround strategy it has employed on its core business.
Luis has promised that under Coach, Spade would pull back from discounting and sell fewer bags at department stores. That strategy boosted Coach's bottom line: it reported an estimates-beating 9 percent jump in profit in its last quarter. But performance in Asia remained relatively flat: sales in China increased 2 percent, but decreased 1 percent in Japan, both on a constant-currency basis. Copying the European cool kids will take more than window dressing.