US antitrust enforcers’ legal battle to kill an $8.5 billion deal marrying Tapestry Inc.’s Coach and Kate Spade brands with Capri Holdings Ltd.’s Versace and Michael Kors labels will hit a critical point on Monday, as a federal judge hears the two sides make their closing arguments.
Her decision on whether to freeze the takeover as anticompetitive, as the US Federal Trade Commission has urged, could mean hundreds of millions of dollars to hedge funds and other investors that are betting on the outcome — and have sent specialists to court to figure out which way the trial, and the judge, might be leaning.
US District Judge Jennifer Rochon, a Joe Biden appointee who took the bench in 2022 and is presiding over her first antitrust trial, will hear the closings in her Lower Manhattan courtroom. She will then decide whether to grant the FTC and its hard-charging chair, Lina Khan, a preliminary injunction stopping the takeover in its tracks while the agency prepares to conduct its own, internal trial.
That’s why merger arbitragers — the specialists who can make, or lose, a small fortune by betting on whether a proposed deal will close — have watched the trial intently, and plan to be there in force to hear both sides make their last impassioned pitches to Rochon.
“You show up to try to pick up any clues from the judge, first and foremost,” Frederic Boucher, a merger arbitrage specialist for brokerage firm Susquehanna Financial Group, said in an interview. “You also try to get a full picture of the evidence. And it’s always good to see who else is there and be able to ask what people’s views are.”
Glued to the Trial
Like many of the arbs who have been glued to the trial, which ran for seven business days starting Sept. 9 and then paused for a couple of weeks, Boucher says he hasn’t detected a lean in the judge yet. But he’s been impressed by the defense as it has batted back the FTC’s argument that the two companies compete head to head in a narrowly defined market segment it calls “accessible luxury.”
The companies have argued that their brands compete in a robust and far larger market, in which it would be hard to raise prices even when combined because the brands aren’t “hot” enough, so it’s the customers who wield the pricing power. They also pointed to weaknesses in an FTC economic expert’s analysis that the combination will yield a 58 percent market share.
Those arguments appear to have gotten the market’s attention. Capri’s shares gained about $5 to $40 over the first seven days of the trial, moving closer to Tapestry’s takeover bid of $57 a share and suggesting the deal’s closing was looking likelier to investors. Yet the stock is still trading at roughly a 30 percent discount to the offer, a sign of the market’s lingering concerns.
Blocking the acquisition would be a coup for Khan, 35, whose challenge is the FTC’s first in the fashion industry under her leadership. She has worked to sink a raft of takeovers in sectors from tech to groceries, with mixed results. Tapestry and Capri say an injunction from Rochon would end the deal right there, with the FTC process ultimately exceeding the deadline for the closing. The agency disputes that.
Dozens of portfolio managers and analysts from top investment firms, as well as brokers and lawyers, have crowded into Rochon’s 20th-floor courtroom and an overflow room across the hall. With no audio feed, and no court transcripts immediately available, some of them travelled from Chicago and London to follow the trial in person. They focused keenly on everything from internal documents to the judge’s follow-up questions and even her body language.
High Stakes
The stakes are high for hedge funds including Millennium Management, Hudson Bay Capital, Pentwater Capital, Citadel Advisors and Balyasny Asset Management, which 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 fund declined to comment beyond that.
The merger arbitrage playbook has become more complex in recent years under Khan. That has prompted investors to devote significant resources to analysing legal proceedings for clues to the fate of takeover deals. It can pay off handsomely. Last year the FTC lost its case to block Microsoft Corp.’s purchase of Activision Blizzard Inc., yielding juicy returns for those who bet on the companies’ victory after closely following the trial.
This time the gallery heard Tapestry CEO Joanne Crevoiserat tell the judge that customers “shop up and down the price spectrum,” meaning Coach and Kate Spade, for example, compete with a vast range of products, from mass market to European luxury brands. Tapestry also owns the Stuart Weitzman label, while Capri, in addition to Michael Kors and Versace, markets Jimmy Choo. The two companies’ brands will continue to compete with each other after the deal closes, she said.
Khan’s Odds
The FTC appeared to score points as well. With Liz Fraser, former CEO of Kate Spade, on the stand, the agency introduced email exchanges and other documents in which Fraser had said the brand didn’t really compete with luxury labels such as Kering’s Gucci and LVMH Moët Hennessy Louis Vuitton SE. During opening statements, a lawyer for the FTC said the case was about “working- and middle-class women who will suffer harm” if the acquisition goes through, adding that more than half of Coach and Michael Kors customers earn less than $75,000 a year.
Jennifer Rie, a senior litigation analyst at Bloomberg Intelligence, who went into the trial thinking it was a coin toss, now gives Tapestry and Capri a 60 percent chance of prevailing, based on the public record of evidence in the case.
“I think the companies did a good job across the board with the majority of their witnesses,” Rie said. “They were able to credibly depict a market that is more competitive and dynamic than the FTC portrayed.”
Still, she cautioned that a lot of documents in the case have been kept confidential and that the judge will be relying on them as well in making her decision.
“Given the high percentage of the evidence that was sealed, it’s difficult to make a stronger call one direction or the other,” Rie said.
The case is Federal Trade Commission v. Tapestry Inc., 24-cv-03109, US District Court, Southern District of New York (Manhattan).
By Yiqin Shen and Bob Van Voris
