If Coach Owner Tapestry Deal Fails, Versace Owner Capri Shares Fall 30%

If a $8.5 billion deal with Tapestry Inc. fails, Capri Holdings Ltd. shares might fall 30% or more. polled merger-arbitrage experts after the US Federal Trade Commission sued on Monday to prevent Tapestry's acquisition of its fashion rival.

Merger-arb traders must predict the court's verdict, which may take months. Wednesday saw a third straight drop in Capri stock. After losing 6% on Monday, it traded at $35.50, well below the $57-per-share buyout price. Prior to the August merger, the stock was at $35.

Capri's dismal earnings the past two quarters complicate traders' task. If the transaction fails, Bloomberg's 20 merger-arb specialists predict the shares will tumble to the mid-$20 area or lower, 30% or more below the current level. The downside potential, or break price, represents respondents' thoughts on the stock's value by year-end, when some predict a clearer merger destiny.

Capri, which owns Michael Kors and Versace, has announced weaker-than-expected earnings twice since August, raising concerns about its future performance. The next earnings report is in May. Tapestry owns Coach, Kate Spade, Stuart Weitzman.

“The break price in Capri is a moving target, making that judgment more complex with significant duration left to the trade,” said FBN Securities merger-arb strategist Brian Lombardi.

He thinks the downside is $22, but the FTC complaint and statements indicate deteriorating odds of the corporations succeeding in court. US Sues to Block $8.5 Billion Coach-Michael Kors Union

Merger-arb traders need to know the downside to earn from betting on a deal's completion while monitoring the firms' performance. The recent Microsoft Corp. purchase of Activision Blizzard Inc. saw traders gamble on a larger downside amid optimism about the target's business. 12 respondents thought Capri may fall $20 to $25, depending on anticipated earnings per share and price-to-earnings ratio.

Some cut their projections Tuesday after Kering SA, whose biggest brand is Gucci, warned that first-half profit will drop, predicting a drop in luxury product expenditure. Four respondents estimated a $26–$30 break price, while two saw $33. Two were more pessimistic, predicting high teens.

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