Coach’s Kate Spade Buyout Is a Win-Win

Kate Spade & Co. (ticker: KATE) and Coach Inc (COH) investors awoke Monday morning to news of a blockbuster merger between the two handbag giants. Coach has announced plans to buy Kate Spade for $2.4 billion, a move that the market sees as a win-win for the two companies.

Coach is reportedly after Kate Spade’s coveted millennial customer base.

“It is a strong brand with a clear and consistent positioning, with leadership in the attributes of fashionable, fun and feminine and a growing share of millennials,” Coach CEO Victor Luis said of Kate Spade.

Moody’s analyst Mickey Chadha says the Kate Spade buyout is part of Coach’s push to “broaden its customer base to a younger, trendier millennial shopper.” Millennials represent 60 percent of Kate Spade’s customer base.

Despite the market reaction, the deal likely didn’t come as a complete shock to either Coach or Kate Spade investors. Since late last year, Luis has been open about Coach’s hunt for “great brands.” Kate Spade has been the subject of buyout rumors since the company confirmed it was exploring “strategic alternatives” back in February.

Wunderlich analyst Eric Beder expects the deal will go through as proposed without any third-party bids.

“Given that we believe Coach makes the most sense as a strategic buyer and the recent weakness in Kate Spade results, we believe the $18.50 [per share] price is fair and we do not expect additional bidders to emerge,” Beder says.

In addition to getting access to a younger customer base, Coach also gets access to a number of new markets. Luis said only 35 percent of Kate Spade stores share a location with Coach stores. For Kate Spade, its alliance with Coach may help the brand penetrate a massive high-growth opportunity in China, where Luis said only about 1 percent of shoppers are currently familiar with the brand.

It’s not often that shares of both the buyer and the target company both react positively to a merger deal, but Coach shares jumped…

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