On the evening of Thursday, October 24, a regional federal judge in the United States approved the Federal Trade Commission's FTC preliminary injunction motion to prevent the American fashion brand Tapestry from acquiring its peer Capri for 8.5 billion USD, otherwise creating a handbag retail giant.

Although the specific reasons for the judgment were not publicly disclosed, in the court documents obtained by the media, the above-mentioned American judge pointed out that "antitrust has entered the fashion industry," and the merger of the two major fashion giants in the United States "will greatly reduce competition in the affordable luxury handbag market."

Originally, according to the merger proposal from last August, Tapestry's Coach, Kate Spade, and Stuart Weitzman, as well as Capri's Michael Kors, Versace, and Jimmy Choo, six fashion brands will be integrated into a large group.

This will also be the merger of the largest two luxury goods companies in the United States. Economic researchers have found that the merged company will occupy approximately 58% of the handbag market in the United States.

After the unfavorable ruling was announced, the stock price of the American fashion luxury group Capri plummeted over 54% after hours on Thursday, and the stock continued to plummet on Friday, dropping over 47% to a four-year low, also setting a record for the deepest decline in history.

Its stock price is less than 22 USD, far below Tapestry's acquisition offer of 57 USD per share, causing a market cap loss of over 2.2 billion USD. Meanwhile, Tapestry's stock price surged nearly 15% to its highest level in six years since 2018.

This year, Capri's stock price has halved, but Tapestry has surged nearly 40%, analysts say if the acquisition fails, Capri may need to find a new buyer.

Some analysts believe that Capri's sharp stock price decline is due to the more severe market share decline of this brand.

As Americans become more picky and cautious about non-essential spending in the high inflation environment, Capri is significantly more affected, as it relies more on department stores and other wholesale retailers compared to Tapestry. The latter's wholesale channel accounts for only about 10% of global sales, with the vast majority of sales coming from websites and self-owned stores. Tapestry is also making many efforts to attract young consumers.

The stock prices of the two companies also reflect this difference. Capri's full-year decline before Friday was 17%, with a sharp drop on Friday widening its full-year decline to 56%, essentially halving its stock price. Meanwhile, Tapestry's year-to-date increase has expanded to 38%.

Telsey Advisory Group CEO Dana Telsey pointed out that the attractiveness of the acquisition is diminishing, as Capri's performance is poor and the transaction time has been extended due to FTC's antitrust litigation challenges: "If the deal fails, Capri may look for another acquirer."

The surge in Tapestry's stock price is because although the company is capable of reviving Capri, this transaction will still bring additional risks to the parent company of Coach. In April of this year, the U.S. FTC called for the acquisition to be blocked, fearing the creation of a huge conglomerate with unfair pricing power.

Tapestry said the acquisition would allow it to enter the high-end luxury goods market and compete with European giants, but the FTC is concerned that Americans may not be able to buy affordable luxury handbags.

Tapestry's CEO Joanne Crevoiserat has pointed out that acquiring Capri to create a handbag giant will enable the two brand groups to keep up with the rapidly changing trends in the fashion industry, not only better positioning against emerging new brands and the ever-changing competition of consumer tastes but also reaching a more diverse customer base of different ages and income levels globally, especially in the luxury and high-end consumer markets where brands like Versace and Jimmy Choo under Capri are located.

According to the original trade plan to be completed in 2024, the combined annual revenue of the two companies will exceed $12 billion, with a business scope covering at least 75 countries and regions globally, and they will be able to compete with European luxury giants.

Brian Jacobsen, Chief Economist of Annex Wealth Management, commented, 'Investors are clearly surprised by the unfavorable ruling of the US judge, as the focus of this deal seems to be participating in global luxury goods market competition, not just in the US market.'

Earlier this year, this merger had already obtained approval from regulatory agencies in Europe and Japan, with only the 'roadblock' of the United States itself remaining.

However, the primary opposition from the US FTC continues to focus on the impact on the US market, consumers, and employees, fearing that the merged giant may harm consumer interests by raising prices and lowering product quality, as well as reducing employee salaries and benefits.

The FTC believes that the brands under both companies fall into the 'accessible luxury' category, especially Coach and Michael Kors are striving to attract younger, more diverse shoppers. Both companies are each other's major direct competitors in various areas such as outfits, eyewear, and shoes.

Some analysts also argue that this ruling could be seen as a victory for the US Biden administration. Under the leadership of FTC Chairman Lina Khan, the regulatory agency has taken action to block multiple mergers in the areas of media, technology, and outfits, with the rationale of not wanting American consumers to face price increases.

Coach and Kate Spade do indeed strive to maintain a high price point, but both companies state they are not direct competitors and face intense competition in the handbag sector.

If the merger between Tapestry and Capri is indeed thwarted, it could also impact the outlook of the industry in the USA. Both companies have stated their intention to appeal, and have consistently argued that handbags are not essential items, and consumers will not purchase them if the prices are too high, indicating that the pricing concerns are unfounded. Moreover, both companies claim they are not primary competitors, as consumers can also purchase European luxury brand handbags through second-hand platforms.

Tapestry released a statement on Thursday evening, stating that the industry where Capri is located is competitive, dynamic, and constantly expanding, with both established companies and newcomers highly diversified: "We face competition pressure from low and high-priced products, and we still believe that this merger is beneficial for competition and consumers."

According to the merger agreement, if Tapestry or Capri abandons the transaction due to not obtaining regulatory approval, or if the government issues a permanent, non-appealable injunction against them, Tapestry agrees to pay Capri between 30 million and 50 million dollars. At the same time, Capri agrees that if it decides to terminate the proposed merger, it will pay a breakup fee of 0.24 billion dollars.

However, in practice, Tapestry is committed to enhancing its brand image and attracting a new generation of young shoppers. Its Coach brand has reduced its product variety, focusing on bestsellers while maintaining high price points by reducing discounts. Kate Spade is also adopting a similar strategy.

Editor/Lambor