Coach-Versace Union Goes to Court Against Biden’s Antitrust Cop

The CEO of Capri Holdings Ltd. told a federal judge he’s hopeful the company’s planned $8.5 billion acquisition by Tapestry Inc., which US antitrust enforcers are trying to block, will revitalize its flagship Michael Kors brand and deliver returns for investors.

John Idol was the first witness in a make-or-break hearing in Manhattan to determine whether the fashion industry deal will go forward or be unwound by President Joe Biden’s Federal Trade Commission, which calls it a threat to competition and is in court seeking an order to freeze it.

The companies are fighting to save a tie-up that would would marry Tapestry’s Coach, Kate Spade and Stuart Weitzman brands with Capri’s Michael Kors, Versace and Jimmy Choo labels. It’s the first fashion industry challenge under FTC Chair Lina Khan as the agency has worked to sink a raft of takeovers in sectors from tech to groceries, with mixed results.

Among the investors watching the legal battle closely are Wall Street’s merger arbitragers, who bet on whether a deal will live or die. Most arbs currently give Tapestry and Capri a better-than-even chance of closing the transaction. David Einhorn’s Greenlight Capital is among those betting the merger will go through. Amid the hearing, which started on Monday morning with opening arguments, Capri shares closed up 5.1% to $36.55, moving closer to Tapestry’s $57-a-share takeover bid. 

One of the companies’ central arguments is that Michael Kors needs the deal to revitalize what a Capri lawyer on Monday called an “iconic but struggling” brand. Idol, Capri’s chairman as well as its chief executive officer, told US District Judge Jennifer Rochon about the heady days of 2016, when the brand peaked at $4.7 billion in revenue and one out of seven women on New York’s Fifth Avenue could be seen carrying a Michael Kors bag. 

Since then, he testified, the label has lost market share and sales due to increased competition from European luxury brands and from less expensive mass market bags. If he sees one woman in 200 carrying a Michael Kors these days, Idol said, “we’re lucky.”

The FTC claims the combination, announced a year ago, would jack up prices on handbags and accessories. It’s asking the judge to slap a preliminary injunction on the takeover, halting it until the agency’s own, in-house trial can proceed. That would effectively kill the deal, as the FTC trial and appeal process could take months or even years.

“This is the show,” Capri lawyer Jonathan Moses told the judge in a court conference ahead of the hearing. “This is the case where it will be decided whether this merger goes forward.”

FTC lawyer Nicole Lindquist told Rochon in her opening statement Monday that the case is about “working- and middle-class women who will suffer harm” if the acquisition goes through. She said more than half of Coach and Michael Kors customers earn less than $75,000 a year.

In his own opening, Tapestry lawyer Lawrence Buterman countered that consumers can choose from “hundreds and hundreds” of brands in the space, with robust competition ranging from new and used bags from high-end brands including Chanel all the way down to a viral $2.99 Trader Joe’s mini-tote.

“Anyone who took the subway to court today, or walked on Broadway or Fifth, or has access to an iPhone or Android phone” can see that the FTC’s claims about market competition “are completely divorced from reality,” Buterman told the judge.

The hearing, a sort of mini-trial to last less than two weeks, will be the first antitrust trial for Rochon, a Biden appointee who took the bench in 2022. She’s a former general counsel for Girl Scouts of the USA.

The case is the latest court challenge to a proposed merger under Biden’s stepped-up approach to antitrust enforcement. The government has suffered some high-profile losses, including a challenge to Microsoft Corp.’s $69 billion acquisition of Activision Blizzard Inc. — a defeat that handed juicy returns to arbs that bet the deal would prevail. The FTC has had some wins, too, including in its suit against Illumina Inc.’s purchase of the startup Grail. 

A federal court in Portland, Oregon, is currently considering the agency’s bid to block a $24.6 billion deal to combine the Kroger Co. and Albertsons Cos. supermarket chains. 

The Tapestry hearing’s outcome will turn partly on how the court looks at the “accessible luxury” handbag category, in which competition on price, discounting, design, marketing and store experience is the fiercest, according to the FTC. That’s where the threat posed to consumers — and to the jobs of the companies’ own employees — is most acute, the agency argues, saying the merger would put more than half the market under one roof. 

The acquisition would create the fourth-largest luxury company in the world and the second-largest in the Americas after LVMH, according to research firm GlobalData. Analysts at TD Cowen led by Oliver Chen define accessible luxury handbags as costing $150 on average and estimate the size of the US market at $10 billion to $15 billion. Looking at the companies’ biggest brands, Coach has an 11% share of that market, while Michael Kors has 9%, the analysts estimate.

The stock market is pricing in a roughly 50% to 60% probability that the deal will go ahead, according to a Bloomberg calculation. 

The case is Federal Trade Commission v. Tapestry Inc., 24-cv-03109, US District Court, Southern District of New York .

With assistance from Jeannette Neumann and Leah Nylen.

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