Is A Coach-Burberry Merger In The Cards?

Coach (NYSE:COH) and Burberry shares were both up on Friday after financial blog Betaville reported the two companies were considering a merger. According to the blog, the US company has been working with financial advisers at Evercore for numerous weeks on a possible deal, rumored to create a $20 billion luxury clothing giant, citing two people familiar with the situation, although the parties were not named. The deal would likely value Burberry at around £18.50 per share. While representatives at both the companies declined to comment, the Financial Times had reported earlier in the year that Burberry had asked its advisers at Robey Warshaw to help prepare a defense for a possible bid. It was reported at that time that a mystery investor had built up a stake of close to 5%, prompting the company to attempt, albeit unsuccessfully, to ask HSBC, which is listed as the custodian for the position, to disclose its client or clients.

See our complete analysis for Coach here

Burberry and Coach are both trying to come to terms with a slowdown in luxury spending by consumers. While Burberry reported sales last week that were better than expected, it disappointed its investors with its performance in Asia. Meanwhile, Coach has earlier reported its plans to cut back on the number of department stores that sells its goods, and reduce its markdown allowances, in order to maintain its brand value. The company also wants to continue with its luxury concept stores, with a total of 400 expected to be completed by the end of the year.

Coach has also talked of a “commitment to making an acquisition,” according to a note published by Stifel, following the success it has achieved with its acquisition of Stuart Weitzman. The company has also expressed a willingness to seek another luxury player, which could benefit from Coach’s strong distribution and sourcing network in the US, and whose business didn’t directly overlap with Coach, and would help in its quest for increased international distribution. In this regard, it can be noted that Burberry is mostly concentrated in the UK and European region, where Coach is looking to bolster its presence. Moreover, Burberry’s merchandise is priced at a higher level than that of Coach. Coach’s strong networks in the US would also, in turn, benefit Burberry.

However, “a merger of Coach and Burberry would primarily be a merger of problems,” according to Luca Solca, analyst at Exane BNP Paribas. Historically, mergers and acquisitions in the luxury sector have not particularly helped in regaining brand traction and desirability. The reasons for the merger are also being questioned, with many speculating it could be for cost-cutting. This, however, has been the downfall for numerous mergers, as many fail when the companies underestimate the complications associated with integration, while overestimating the benefits that can be derived from synergy. While the euro and pound are at historic lows, as a result of the Brexit, making the acquisition favorable, there is no guarantee whether the speculative merger will prove to be successful.

Have more questions on Coach? See the links below:

• Why Has Coach’s Stock Price Risen 30% In One Year?
• What Is Coach’s Plan With Regards To Its Store Footprint?
• Coach Q4 And FY 2016 Earnings: A Return To Growth In North America
• Why Do We Feel Coach Has A 17% Upside Potential?
• How Will Coach Close Out Its Financial Year?
• What Will Be Coach’s Revenue And EBITDA Breakdown In 2016?
• How Will Coach Perform In 2016?
• What Will Be The Impact of Coach’s Collaboration With Disney?
• How Has Coach’s Revenue Per Square Foot Changed Over The Years?
• What Percentage Of Coach’s Stock Price Can Be Attributed To Growth?
• What Has Resulted In A Decline In North American Net Sales And A Rise in International Sales For Coach So Far In FY 2016?
• Coach’s Strong Presence In China To Help The Company In The Future
• How Did the Different Segments Of Coach Perform In Q3 2016?
• How Has The Transformation Plan Affected Coach’s North American Retail Store Count?
• Coach Q3 2016 Earnings And Revenue Beats Expectations
• What To Expect From Coach In Q3 FY 2016?
• Is Coach’s Transformation Plan Working?
• Coach: Year 2015 In Review
• Is The Men’s Segment Becoming Big Business For Coach?
• How Will Coach’s Revenue And EBITDA Change In The Next 3 Years?
• What Is Coach’s Fundamental Value Based On Expected 2016 Results?

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