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M&A Arb Update: Analyzing the FTC Complaint Against Tapestry (TPR) and Capri (CPRI)

M&A Arb Update: Analyzing the FTC Complaint Against Tapestry (TPR) and Capri (CPRI)

Rebuttals against core complaints, backed by data and research

As my first paid research post, I’m going to be going over the FTC complaint in detail and address all of their concerns, and provide rebuttals and counterpoints to each argument.

Those of you reading this for the first time can read my prior two posts below from December of 2023 and March of this year.

In each of those posts, I addressed the deal overall, and why before the FTC suit, it should not be blocked under anti-trust concerns.

However, as we all know by this point, the FTC sued to block the merger between Tapestry (TPR) and Capri (CPRI) on April 23rd. You can find a PDF copy below.

Ftc Tapestry Complaint
382KB ∙ PDF file

I will caveat that a lot is redacted to the point where you’d think you’re trying to read some CIA documents in certain places, but no matter, the points still got across.

This suit finally confirmed what the market was preparing for and as of May 7th, depending on your break price, the deal probability of going through sits anywhere from ~30 - 43%.

Before diving in though, I need to clarify a few things.

  1. Based on Tapestry’s response to the suit, it seems that Joanne (CEO of TPR) wants the Capri assets and will fight in court to get them. Quoting her directly

“There is no question that this is a pro-competitive, pro-consumer deal and that the FTC fundamentally misunderstands both the marketplace and the way in which consumers shop. We have strong legal arguments in defense of this transaction and look forward to presenting them in court and working expeditiously to close the transaction in calendar year 2024.”

  1. Prior to graduating college, I worked many retail jobs in the clothing industry here in NYC. Most notably, for Thomas Pink at Bloomingdale’s flagship on 59th street where I was very familiar with all the brands in question.

  2. I was interning at Merrill Lynch in the C&R group when the Michael Kors/Jimmy Choo deal took place. I was a part of the acquisition financing.

  3. The court date is set for September 9th.

  4. I do hold a long position in Capri (CPRI) at the time of writing this post.

So with that, let’s get into it and go point by point on each of the FTC’s complaints on the deal and then my odds on their case at the end.

First and foremost, I think we need to tackle low-hanging fruit here that I believe is just thrown in to provide some type of ammo in a suit but doesn’t hold much water.

In the FTC’s own words

“With Tapestry’s acquisition of Michael Kors, the closest competitor of Coach and Kate Spade, consumers will lose the benefit of head-to-head competition on price, discounts and promotions, innovation, design, marketing, and employee wages and workplace benefits.”

Let’s first address the employee wages and benefits argument.

1) Employee Wages & Benefits

The FTC claims that the combined company (“NewCo”) of Tapestry (TPR) and Capri (CPRI) will hurt employee’s ability to get better wages and benefits because there’s no more competition between the two.

They cite that in 2021, Tapestry publicly committed to a $15/hr minimum wage1 in the U.S. for hourly employees, and less than two months later, Capri also decided to raise the minimum wage to $15/hr. Good stuff!

The problem here is that this is not a competition issue. Salaried employees might be harder to retain or convince to join, thus keeping top talent — think Google, Amazon, Meta, etc — but retail has never been. It’s no secret that retailers always want to try and help the margins out in their stores and workers’ wages are usually only met to meet the requirements.

However, this claim that NewCo will lead to lower wages is completely false. Retail wage issues are nothing new. Take for example the tit-for-tat exchange with Target and Walmart.

In April of 2019, before the pandemic, Target raised its minimum wage to $13/hr2 from $12/hr with the plans of increasing it to $15/hr by the end of 2020. At the time, Amazon had raised its minimum wage to $15/hr in October of 2018 and Costco also raised its minimum hourly wage to $15/hr.

Pulling from the same Reuters article,

“Retailers have been finding it tougher to attract workers, with U.S. unemployment at its lowest level in nearly 50 years, while there has been growing political pressure on companies to pay workers a fair living wage.”

Given that unemployment is right on par with where we were pre-pandemic, I’d say not much has changed.

Additionally, the pandemic just made things worse for retailers as fears of contracting COVID and receiving enhanced jobless benefits, including a government-funded $300/week, paid more than most minimum wage positions. Tack on the lack of affordable child care, retail theft on the rise, and of course the big one being working retail just sucks in general, it’s no wonder workers didn’t want to come back.

This is why Tapestry felt it necessary to raise the minimum wage and according to Reuters, was the latest company to push incentives to lure people back into the workforce.

Also, just look at the GlassDoor reviews when it comes to employee satisfaction:

So here’s the first dent to the FTC’s argument.

Given the low skills needed to perform these jobs, whether you work retail for Tapestry, Target, Costco, or wherever, retail is competing with retail, not the other retailers within the same sector.

This is a fact and Vox did a piece3 on the industry back in June of 2021 highlighting why retail workers are quitting to go elsewhere.

“Even before the pandemic, a lot of retail jobs weren’t good jobs. Jobs in the industry were largely ‘considered stopgap jobs’ with low status and low pay.”

This is just the mechanics of retail jobs that the FTC has completely missed the ball on. As long as labor is tight, and retail still sucks as a job, it’s going to take companies paying more and offering more benefits in order to retain talent.

Market dynamics are self-fulfilling here.

Also, the FTC complaint highlights that the company employs 33,000 in total who would supposedly be affected by the merger. Given that many workers are abroad and are making the physical goods to sell in the U.S. it makes little sense for the FTC to blindly loop in international employees into that calculation. It just doesn’t make sense. International employees are out of the scope of the FTC.

Takeaway: The facts speak for themselves. Tight market + shitty job type in general = employers needing to pay up or not have enough workers. Slim chance to none this works.

Odds: 0-5%


2) Market Definition

The main FTC complaint is that NewCo will command too much of the “accessible handbag” market share in the U.S., thus hurting consumers.

“Accessible” being the term coined by Tapestry 20 years ago to bridge the gap between mass-market and true luxury. Mass-market is addressed in her complaint as typically being anything that is below $100 and luxury being priced to be out of reach to the masses (relative and also subjective).

That’s the core argument, albeit a very vague one. Because of this, Tapestry filed a motion over the weekend arguing that it is the FTC's burden to define the relevant markets in any of its merger challenges, something that the regulatory agency has "continuously refused" to do since it moved to block the megadeal last month.4

The FTC,

"fails to answer the basic question of what the FTC defines as a ‘handbag’ or ‘accessible luxury.’ For example, the complaint gives no guidance as to whether "handbags" include some or all of women's and men's handbags, backpacks, duffel bags, cross-body bags, business bags or other small bags. The complaint's definition of ‘accessible luxury’ relies on ‘vague, hedged and sometimes contradictory language’ to differentiate it from ‘mass market’ and ‘luxury.’

The FTC provides no clarity as to what products fall within which categories. Simply put, defendants do not know if the FTC's 'accessible luxury handbag' market is defined around certain brands, is bounded by price points, or is defined by the consumer's household income.’ ‘All of these factors are splayed throughout the rambling complaint — and yet there is no simple definition. What is in the market and what is out?’"

You can find the formal TPR response via the PDF below.

TPR FTC Complaint Response
1.29MB ∙ PDF file

In my personal opinion, I think TPR really ripped the face off the FTC and made them look bad. Based on the rebuttals, it made the FTC look like they had no idea what they were talking about, especially when it came to defining the market.

“The FTC mistakenly believes there are only three options for a consumer seeking a high-quality handbag in whatever price range the FTC ultimately settles on for its untenable “accessible luxury” handbag market: Tapestry’s Coach and Kate Spade, and Capri’s Michael Kors. Indeed, the FTC’s Complaint incredibly goes so far as to decry that these three brands constitute a “duopoly” in that market.”

Hard to say you don’t control 100% of the market when the market you’re defining is literally just 3 companies.

To further reinforce this market definition point, using Euromonitor data (below), the market definition between “luxury” and “affordable luxury” can very well mean the difference between having a 45% market share in North America or 22%.

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