Spread on Capri – Tapestry Deal Widens – Merger Arbitrage Mondays

  • November 13, 2023

Key Highlights

  • Tapestry’s (TPR) acquisition of Capri Holdings (CPRI) received a second request from the Federal Trade Commission.
  • Bluegreen Vacations Holding Corporation (BVH) to be acquired by Hilton Grand Vacations (HGV) for $1.5 billion or $75 per share in cash.
  • Seven active deals were completed successfully last week.

Capri Holdings Limited (CPRI) $47.11

Market Cap: $5.48 billion

Enterprise Value: $9.03 billion

On August 10, 2023, Tapestry (TPR) announced that it was acquiring Capri Holdings Limited (CPRI) at $57.00 per share in cash for a total enterprise value of approximately $8.5 billion. The offer represented a premium of almost 65%. The companies plan to bring together prominent brands like Tapestry’s Coach and Kate Spade, along with Capri’s Jimmy Choo and Versace, in order to rival major competitors such as Paris-listed LVMH.

The spread on the deal jumped significantly last week after the companies received a second request from the FTC and Capri Holdings announced its Q2 fiscal 2024 results. The waiting period under the HSR Act was expected to expire on October 8.

A 17.3% spread on the Capri - Tapestry merger is the strangest thing I have seen in the arb world in a while.

Capri Tapestry Deal Spread History

We wrote the following about this deal in detail in our September 2023 Special Situations Newsletter:

Tapestry’s acquisition of Capri is an $8.5 billion all cash deal at $57 per share. The deal is expected to close in calendar year 2024 and we are conservatively estimating that it would close by mid-2024.

Tapestry is paying 9 times trailing twelve months EBITDA for Capri and a 59% premium to Capri’s 30 day average price before the deal was announced. Given the performance of Capri, I would be surprised if the deal runs into shareholder opposition. Over the last five years, the stock spent more time well below the $57 acquisition price than it did above it.

The acquisition strategy hasn’t quite worked out well for the company with the stock down more than 50% over the last five years before this acquisition was announced. Interestingly Capri generated net income of $839 million in fiscal 2016 (ended April 2016) on revenue of $4.71 billion. Seven years later, with revenue of $5.62 billion, net income was $616 million in fiscal 2023.

Capri’s acquisition playbook mirrored what Coach had done a couple of years earlier. Coach acquired luxury footwear company Stuart Weitzman for $574 million in 2015 and then followed with the larger acquisition of Kate Spade for $2.4 billion in July 2017. The company rebranded itself as Tapestry shortly thereafter in October 2017.

Both companies traded at low valuations following these acquisitions and both companies rolled out large billion dollar buybacks but the stock underperformance continued.

Second Quarter Fiscal 2024 Highlights

On November 9, 2023, Capri Holdings Limited announced its financial results for the second quarter of Fiscal 2024 ended September 30, 2023. The company fell short of its own expectations. The decline impacted all three brands: Michael Kors saw a sales decline of 8.6% to $879 million, Versace experienced a 9.1% decrease to $280 million, and Jimmy Choo faced a 7% reduction to $132 million.

  • Total revenue of $1.29 billion decreased 8.6% compared to the previous year. Gross profit was $832 million and gross margin was 64.4%, compared to $951 million and 67.4% in the prior year.
  • Income from operations was $100 million and the operating margin was 7.7%, compared to $252 million and 17.8% in the prior year.
  • Net income was $90 million, or $0.77 per diluted share, compared to $224 million, or $1.63 per diluted share, in the prior year.
  • Net inventory as of September 30, 2023, was $1.1 billion, a 7% decrease compared to the prior year.

In July 2023, Capri Holdings introduced an Ecommerce platform for Michael Kors in the Americas. Despite its intention to enhance user experience and consumer engagement, the transition posed unforeseen challenges, resulting in a $50 million negative impact on Michael Kors’ revenue for the quarter. Although trends are showing improvement, the company anticipates ongoing impacts on third-quarter revenue.

Risks

The merger requires clearance or approval in accordance with antitrust laws in Australia, Canada, China, the EU, Japan, Korea, and the United Kingdom. Additionally, approval by the European Commission under the EU Foreign Subsidies Regulation is also a prerequisite for the merger.

The deal has received approval from shareholders.

The anticipated completion of the deal is in the calendar year 2024, and we are providing a conservative estimate that it is likely to conclude by mid-2024.

In case of termination, Capri Holdings will have to pay a termination fee of $240 million. The outside date for the deal is August 10, 2024.

The current spread on the deal is almost 21% with an annualized return of over 33% if the deal is completed by mid-2024.

There has been speculation that Tapestry may attempt to walk away from the deal given Capri’s poor Q2 earnings or might attempt to recut the deal. While Q2 earnings were not good, they were not bad enough for Tapestry to claim that there was a material adverse effect (MAE). Both these companies have struggled because they moved downmarket and diluted their brands with excessive promotional activity. They attempted to stem the decline in their stocks by announcing large buyback programs but the impact was temporary.

The companies will be stronger together and might stand a chance at turning around their brands. I believe the thesis has not changed and the spread continues to offer an attractive opportunity to arbitrageurs.


Merger Arbitrage activity decreased last week with three new deals announced and seven deals completed.

You can find all the active deals listed below in our Merger Arbitrage Tool (MAT) which automatically updates itself during market hours.

Merger Arbitrage

Deal Statistics:

Total Number of Deals Closed in 2023159
Total Number of Deals Not Completed in 202312
Total Number of Pending Deals
Cash Deals44
Stock Deals22
Stock & Cash Deals4
Special Conditions7
Total Number of Pending Deals77
Aggregate Deal Consideration$1 trillion

New Merger Arbitrage Deals:

  1. The acquisition of Bluegreen Vacations Holding Corporation (BVH) by Hilton Grand Vacations (HGV) for $1.5 billion or $75 per share in cash.
  2. The acquisition of Hammerhead Energy (HHRS) by Crescent Point Energy (CPG) for $1.73 billion in a cash plus stock deal. Under the terms of the agreement, each Hammerhead Share will be exchanged for C$15.50 of cash consideration and C$5.50 in value in the form of common shares of Crescent Point, based on the offering price of the concurrent equity offering announced by Crescent Point.
  3. The acquisition of GAN Limited (GAN) by Sega Sammy Creation for $85.73 million or $1.97 per share in cash.

Deal Updates:

  1. On November 6, 2023, Renesas Electronics Corporation extended the expiration date of its tender offer to acquire all of the outstanding ordinary shares of Sequans Communications (SQNS) to November 21, 2023. The Secretary of State in the Cabinet Office of the United Kingdom has determined not to take any further action in relation to the previously announced proposed acquisition of Sequans by Renesas under the National Security and Investment Act 2021.
  2. On November 8, 2023, Computer Task Group, Incorporated (CTG) announced that the expiration of the tender offer has been extended to December 12, 2023, and the companies expect the sale of CTG to Cegeka to close on December 13, 2023.
  3. On November 8, 2023, Eli Lilly and Company (LLYextended the expiration of the tender offer to acquire all of the issued and outstanding shares of POINT Biopharma Global (PNT) to November 16, 2023. The proposed acquisition is expected to close near the end of 2023.
  4. November 9, 2023: National Western Life Group (NWLI) and Prosperity Life Group filed the required notifications with the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission on November 3, 2023, and the waiting period under the HSR Act is scheduled to expire on December 4, 2023.

Approvals:

  1. On November 6, 2023, Abcam (ABCM) announced that its shareholders approved the proposal for Danaher (DHR) to acquire all of the outstanding shares of Abcam.
  2. On November 7, 2023, shareholders of NextGen Healthcare (NXGNapproved the company’s merger with Thoma Bravo at a special meeting of shareholders.
  3. On November 8, 2023, EQRx, Inc. (EQRX) stockholders voted to approve Revolution Medicines’ proposed acquisition of EQRx. The transaction is expected to be completed in November 2023.
  4. On November 8, 2023, shareholders of Hersha Hospitality Trust (HTapproved the company’s merger with KSL Capital Partners, LLC at a special meeting of shareholders.
  5. On November 8, 2023, shareholders of Acer Therapeutics (ACERapproved the company’s merger with Zevra Therapeutics (ZVRA) at a special meeting of shareholders.
  6. November 9, 2023: According to Seeking Alpha, China’s State Administration for Market Regulation granted clearance for Danaher Corporation’s (DHR) purchase of Abcam (ABCM).

Hurdles:

  1. On November 3, 2023, Capri Holdings Limited (CPRI) and Tapestry (TPR) received a request for additional information and documentary materials from the FTC regarding the FTC’s review of the transaction.

Shareholders Meeting Schedule

  1. On November 6, 2023, Western Asset Mortgage Capital Corporation (WMC) announced that it expects to adjourn its special meeting of stockholders relating to the proposed merger with AG Mortgage Investment Trust until December 5, 2023.
  2. Arco Platform Limited (ARCE) – December 4, 2023
  3. RPT Realty (RPT) – December 12, 2023
  4. PCTEL, Inc. (PCTI) – December 12, 2023

Closed Deals:

  1. The acquisition of Avid Technology (AVID) by an affiliate of STG was completed on November 6, 2023. It took 89 days for this deal to be completed.
  2. The acquisition of PolyMet Mining Corp. (PLM) by Glencore AG was completed on November 6, 2023. It took 112 days for this deal to be completed.
  3. The acquisition of Hostess Brands, Inc. (TWNK) by The J. M. Smucker Company (SJM) was completed on November 7, 2023. It took 57 days for this deal to be completed.
  4. The acquisition of New Relic (NEWR) by Francisco Partners and TPG was completed on November 7, 2023. It took 100 days for this deal to be completed.
  5. The acquisition of Intercept Pharmaceuticals (ICPT) by Alfasigma S.p.A was completed on November 8, 2023. It took 43 days for this deal to be completed.
  6. The acquisition of EQRx (EQRX) by Revolution Medicines (RVMD) was completed on November 9, 2023. It took 100 days for this deal to be completed.
  7. The acquisition of NextGen Healthcare (NXGN) by Thoma Bravo was completed on November 9, 2023. It took 64 days for this deal to be completed.

Weekly Spread Changes:

The table below shows weekly spread changes between November 3, 2023, and November 10, 2023.

SymbolQuoteAcquiring
Company
Acquiring
Company Quote
Current
Spread
Last Week
Spread
Spread Change
Weekly
Deal
Type
SAVE8.78JetBlue Airways Corporation (JBLU)3.875253.08%175.31%77.77%All Cash
AMTI0.171Cyclo Therapeutics, Inc. (CYTH)1.3335.33%8.09%27.24%All Stock
IRBT28.57Amazon (AMZN)143.5881.13%59.82%21.31%All Cash
MIXT5.1PowerFleet, Inc. (PWFL)2.0877.82%61.61%16.21%All Stock
CPRI47.11Tapestry, Inc. (TPR)28.1220.99%11.66%9.33%All Cash
SATS9.99DISH Network Corporation (DISH)3.435-2.00%1.43%-3.43%All Stock
SLGC2.45Standard BioTools Inc. (LAB)2.17-1.69%1.93%-3.62%All Stock
ACER0.9Zevra Therapeutics, Inc. (ZVRA)4.16-32.22%-28.24%-3.98%Special Conditions
CWBC13.1Central Valley Community Bancorp (CVCY)15.79-4.78%0.83%-5.61%All Stock
GTH3.695New Genetron Holding Limited and Genetron New Co Limited (N/A)9.07%15.14%-6.07%All Cash

Top 10 Merger Arbitrage Deals With The Largest Spreads:

Please do your own due diligence on deals with large spreads. Some of these large spreads might be related to regulatory issues or because of the way the deal is structured. We classify some of these deals as “special situation” deals in our merger arbitrage tool and provide additional details to help with the analysis. There may be unique situations related to special dividends, spinoffs, proration, etc. that need to be accounted for when looking at these spreads.

SymbolAnnounced
Date
Acquiring
Company
Closing
Price
Last
Price
Closing
Date
ProfitAnnualized
Profit
SAVE07/28/2022JetBlue Airways Corporation (JBLU)$31.00$8.7806/30/2024253.08%399.88%
IRBT08/05/2022Amazon (AMZN)$51.75$28.5708/05/202481.13%110.91%
MIXT10/10/2023PowerFleet, Inc. (PWFL)$9.07$5.103/31/202477.82%202.89%
AMTI09/21/2023Cyclo Therapeutics, Inc. (CYTH)$0.23$0.17112/31/202335.33%263.20%
ACI10/14/2022The Kroger Co. (KR)$27.25$21.1803/31/202428.66%74.72%
CPRI08/10/2023Tapestry, Inc. (TPR)$57.00$47.1106/30/202420.99%33.17%
PNM10/21/2020Avangrid, Inc. (AGR)$50.30$42.1612/31/202319.31%143.82%
GAN11/07/2023Sega Sammy Creation Inc. (N/A)$1.97$1.65512/31/202419.03%16.74%
CNSL10/16/2023Searchlight Capital Partners and British Columbia Investment Management Corporation (N/A)$4.70$4.20501/15/202511.77%9.99%
NGMS05/14/2023Aristocrat Leisure Limited (ALL.AX)$29.50$26.5805/14/202410.99%21.79%

Deals In The Works

Three new potential Merger Arbitrage deals were added to the ‘Deals In The Works‘ section last week.

  1. On November 6, 2023, Gold Resource Corporation (GORO) announced that its Board of Directors has decided to initiate a formal review process, with the assistance of outside financial and legal advisors, to evaluate strategic alternatives including a potential sale of the company.
  2. On November 6, 2023, BEST Inc. (BEST) announced that its board of directors has received a preliminary non-binding proposal letter dated November 3, 2023, from Mr. Shao-Ning Johnny Chou, founder, chairman of the Board and chief executive officer of the company.
  3. November 9, 2023: According to Reuters, Astra Space (ASTR) founders Chris Kemp and Adam London proposed to acquire the small rocket maker for $27.8 million, or $1.50 per share in cash.

Updates:

  1. On November 8, 2023, a Buyer consortium led by Recco Control Technology and Dazheng Group increased its offer to acquire Hollysys (HOLI) to $26.50 per share.

SPAC Arbitrage

Potential SPAC IPO

  1. On November 8, 2023, Sichuan Wanma Benteng Technology Co. (WMBT) submitted its S-1 filing for a $70 million IPO.

SPAC IPO

  1. On November 8, 2023, Agriculture & Natural Solutions Acquisition Corp. (ANSCU) announced the pricing of its $300 million IPO.
  2. On November 8, 2023, AI Transportation Acquisition Corp (AITRU) priced its initial public offering of $60 million.

Completed

  1. On November 6, 2023, Worldwide Webb Acquisition Corp. (WWAC) completed its business combination with Aeries Technology (AERT).
  2. On November 7, 2023, OmniLit Acquisition Corp. (OLITcompleted its business combination with Syntec Optics Holdings, Inc. (OPTX).
  3. On November 7, 2023, Data Knights Acquisition Corp. (DKDCAcompleted its business combination with OneMedNet Corporation (ONMD).

Terminated

  1. On November 9, 2023, Blockchain Coinvestors Acquisition Corp. I (BCSA) and Qenta terminated their business combination.
  2. On November 9, 2023, Arogo Capital Acquisition (AOGOterminated its business combination with EON Reality.

List of all pending Merger Arbitrage deals:

Disclaimer: I hold long positions in Spirit Airlines (SAVE), Seagen (SGEN) and Capri (CPRI). Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.