Coach snags handbag rival Kate Spade in $2.4 billion deal

Kate Spade & Co (NYSE:KATE) shares are surging in the pre-market trading on Monday after the company revealed that it struck a deal with Coach Inc (NYSE:COH) to be acquired for $18.50 a share in cash.

Actress Victoria Justice poses at kate spade NY Spring 2017 Fashion Presentation at Russian Tea Room on February 10, 2017 in NY City.

In February, Kate Spade confirmed it was considering "strategic alternatives", as the luxury retailer faces pressure from USA hedge fund Caerus Investors, which said the company would make an excellent acquisition target.

Coach is paying $18.50 per share for Kate Spade.

"Through this acquisition, we will create the first New York-based house of modern luxury lifestyle brands, defined by authentic, distinctive products and fashion innovation", Victor Luis, the chief executive of Coach, said in a statement.

Meanwhile, Coach CFO Kevin Wills, says the company expects to realise a run rate of about $50m in synergies within three years of the deal closing.

"These cost synergies will be realized through operational efficiencies, improved scale and inventory management, and the optimization of Kate Spade's supply chain network", he said. Some 60 percent of Kate Spade's customers are millennials, a group Coach is attempting to appeal to.

Coach's decision to pull the company's handbags and leather goods out of 25% of department stores has been a positive step, as the heavy discounting in this channel has hurt its luxury brand image.

Luis also told Reuters: "We are very excited that Kate Spade has strength with the millennial consumer, we see that not only through their sales but their online engagement". He struck his first major deal in 2015 when Coach beat competition from rival retailers to acquire women's luxury shoemaker Stuart Weitzman for $574m to bolster its footwear offering.

Among the growth opportunities is China, where only 1% of consumers can name the Kate Spade brand without prompting, while 23% can name the Coach brand, Luis said.

The stock has risen 17% since December 27, a day before the Wall Street Journal reported the company was looking to sell itself.

Victor Luis, CEO of Coach, in a statement touted the company's experience operating retail stores around the world and brand building in foreign markets, saying it would be poised to tap Kate Spade's potential for worldwide expansion. Sales fell slightly in the quarter to $271 million, while earnings declined to 1 cent a share from 5 cents a year earlier.

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