The big news this week comes by way of a blocked merger. Judge Jennifer Rochon of the U.S. District Court for the Southern District of New York granted the Federal Trade Commission (“FTC”)’s bid for a preliminary injunction on Thursday, finding that Coach-owner Tapestry and Michael Kors’ parent Capri Holdings are “close competitors” operating in the distinctly defined “accessible luxury handbag” market and that the merger would result in the loss of “head-to-head” competition and hurt consumers. Because the proposed merger would “likely substantially lessen competition in the market for accessible-luxury handbags,” the deal would violate of Section 7 of the Clayton Act,” Judge Rochon wrote.
Some Background: This spring, the FTC issued an administrative complaint and authorized a lawsuit in federal court in furtherance of an effort to block a proposed deal to combine Tapestry Inc. and Capri Holdings. According to the consumer protection-focused regulator, the $8.5 billion deal, which was first announced in August 2023, “seeks to combine three close competitors – Tapestry’s Coach and Kate Spade brands and Capri’s Michael Kors brand.” If allowed, the FTC has alleged that the merger “would eliminate direct head-to-head competition between Tapestry’s and Capri’s brands” and “give Tapestry a dominant share of the ‘accessible luxury’ handbag market, a term coined by Tapestry to describe quality leather and craftsmanship handbags at an affordable price.”
The FTC’s case centers on the “accessible luxury” market. It has argued (and Judge Rochon seemed to be persuaded) that “Coach, Kate Spade, and Michael Kors brands compete to sell ‘accessible luxury’ handbags” in this “distinct market” that has “peculiar characteristics, as well as distinct prices and consumers and unique production facilities” that distinguishes it from the markets for other types of handbags, namely, mass-market and fully-fledged luxury.
> What Now?
Not exactly the end of the matter: The preliminary injunction – which Tapestry says it will appeal – buys the FTC time to make its case in the merger-specific proceeding that is currently playing out before an administrative court. And it looks like additional time will be necessary. In furtherance of the administrative proceeding, the FTC is drawing in and seeking information from dozens of companies – from Chanel, Ralph Lauren, and Prada to the likes of Dillard’s, eBay, and The RealReal.
The administrative proceeding is expected to take several months at a minimum. This adds a tricky angle to the Tapestry, Capri deal, which has a February 10, 2025 expiry date that very well may come to pass before the FTC is done with its case.
Tapestry has expressed dedication to the deal, saying just this week that it will appeal the decision, a move that is “consistent with our obligations under the merger agreement,” and may seek out an expedited appeal before the U.S. Court of Appeals for the Second Circuit in an effort to save the deal.
> The Bigger Picture
As for what the preliminary injunction and the FTC’s case, more broadly, mean for future fashion deals, it very well may embolden FTC chairwoman’s Lina Khan’s already-aggressive agenda. Language from Judge Rochon – who stated that “downplaying the importance of handbags as nonessential discretionary items that consumers can simply choose not to buy if the price is too high ignores that handbags are important to many women” – goes directly against criticisms of the FTC’s case. As the New York Times reported, the FTC’s decision to pursue the case has been “fodder for [Khan’s] detractors, who argued that the FTC’s time was better spent protecting industries other than handbags.”
This may give impetus to the FTC to take on additional actions in the fashion arena. The proposed merger between Saks and Neiman Marcus, which is being valued at $2.65 billion deal and is awaiting regulatory approval, may be its next target.
More realistically, the judge’s apparent backing of the FTC’s narrowly definition of the relevant market – which has been the critical (and controversial) aspect of the case thus far – will impact future deals across industries. The FTC has sought to block the deal on the basis that the merger would provide a combined Tapestry-Capri entity with a 59 percent share of the “accessible luxury” market, thereby, separating out the broader mass-market and “high-end luxury” market in order to make its case.
> Analyst Analysis, Another Deal?
A number of analysts expect the Tapestry, Capri deal to fall through as a result of the injunction. The recent set back leaves Capri “very exposed,” Neil Saunders, managing director of consultancy GlobalData, said this week. “The company is in poor shape and, in betting on being acquired, has neglected the hard work that needs to be done to course-correct many of its weak brands.” (Hardly a novel tactic; the same was true for YNAP, which seemed to have placed all of its attention in recent years on a Farfetch acquisition that never came to be.) Capri may find a new buyer, but the deal is unlikely to be as good as the one it reached with Tapestry, according to analysts.
Meanwhile, Bernstein analyst Ivan Holman stated in a note on Friday that the potential deal-breaking injunction “is good news for Tapestry. As Capri’s performance unravels, investors (and we) increasingly dislike this deal.” As such, a “no-deal outcome is the ideal scenario for Tapestry, allowing management to shed the deal-related debt, resume a generous buyback program, and get credit for the strength of the Coach brand, which has outperformed even ‘High Luxury’ peers despite a tough macro environment.”
Looking beyond big-wigs like Tapestry and Capri, relatively smaller brands are taking the spotlight as of late. Bernstein analyst Luca Solca revealed this week that “smaller brands have had more success maintaining brand heat in China.” He noted that Miu Miu, Versace, Montblanc, Dolce & Gabbana, and Ralph Lauren were the top five brands on China’s social media platforms in 3Q24. (Solca noted that while Louis Vuitton, Dior, and Chanel remain the three largest brands by social media presence, momentum and heat across the largest brands has “continued to cool over the past nine months.”)
Meanwhile, the likes of Miu Miu, Loewe, Alaia, Jacquemus, and The Row nabbed spots in the top 10 of Lyst’s Q3 index of “fashion’s hottest brands,” beating out giants like Hermès, Chanel, Louis Vuitton, etc., a further nod to the success of “smaller” brands.
As Italian regulators crack down on companies’ supply chains, the Court of Milan has lifted a period of special administration for Alviero Martini, which came under fire with prosecutors after allegedly offering up products that had been made in sub-par working conditions. The Italian womenswear and menswear brand was ordered to undergo a period of administration after a probe by Italian officials found that it had sub-contracted work to Chinese-owned firms in Italy, which were running afoul of domestic labor laws. The court opted to end Alviero Martini’s year-long period of administration early (after 9 months) on the basis that the company “showed a deep understanding of the rationale of the measure, achieving what was required without any negative impact on the company’s turnover,” according to the court.
If this sounds familiar, that is because entities related to both Armani and Dior have been embroiled in similar situations. In June, a Milan court appointed a commissioner to oversee the operations of Dior Manufactures SRL, an LVMH-owned maker of Dior-branded handbags, after an investigation into four of its suppliers in and around Milan “uncovered illegal working conditions for staff.”
Before that, in a court order released in early April, the Court of Milan stated that Armani supplier, Manifatture Lombarde, “used subcontractors in the Milan area that employed undocumented migrants for the production of Armani bags, leather goods, and other accessories.” These individuals were subjected to “particularly disadvantageous working conditions,” including requirements that they work a greater number of hours than the company officially declared and the payment of wages of between €2 and €3 ($3.25) per hour.
The court orders in these cases come amid a years-long effort by the Milan public prosecutors’ office to investigate the outsourcing of production by large groups in fashion and other industries to subcontractors that allegedly exploit workers.