Capri has been cancelled

Tapestry > Capri deal blocked by Judge Rochon. But what about Offshore Drillers?

Oct 25, 2024

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Capri has been cancelled

“Antitrust has come into fashion” argued Judge Jennifer Rochon, the judge who blocked the acquisition of Capri Holdings by Tapestry.

After her ruling was published Thursday after-market hours, Capri was cut in half while Tapestry went up by >10%..

Capri Holdings and Tapestry have said they will jointly file for appeal. It seems both parties will continue pursuing this deal until it closes.

But for now, it seems Capri has been cancelled… at least for those who were long this deal actually closing.

So, what happened?

Last August Tapestry made an all-cash offer for Capri at $57 a share. Capri is now trading at $22.50 (after last night’s tanking). The deal had momentum as it received approvals from all major jurisdictions — except from the U.S.

Le Shrub

was all over this merger-arbitrage trade and broke it down exquisitely in this piece. 🌳👜

The FTC seemed to have a lot of time on its hands so it thought, let’s just block this bag merger. Their argument was that the merged entity would gain a dominant share in the “accessible luxury” handbag market.

Let’s head over to Excel for some proper investment work 👇

Wow…so together the two would control all these 6 brands, and more to boot! That would really put the international handbag market in shock and disarray. (Sarcasm)

Tapestry’s Arguments

Lawyers on the side of Tapestry tried to fight the FTC’s arguments by arguing that the industry they operate in is intensely competitive and highly fragmented. Reasoning that the merger would not affect the market in any negative way.

While the FTC made its case that the merged entity would control >50% of the “accessible luxury” market, defined as bags ranging from $100 to $1000 — Tapestry argued that things don’t work like that.

"We face competitive pressures from both lower and higher-priced products and continue to believe this transaction is pro-competitive and pro-consumer."

Tapestry argued that the market trades more like on a SPECTRUM, rather than in strict sub-categories. A willing buyer that can buy a bag at $800 can also probably buy a bag at $1,100 — especially if the seller pushes him away by losing competitiveness…by, I don’t know, raising prices unfairly?

So, the market definitely regulates its OWN self in that regard.

This isn’t like Capri and Tapestry are the only bag makers in the world and buyers are forced to deal with them! Capri and Tapestry aren’t Google and Microsoft — *wink*!

Also, it’s kinda stupid blocking this merger while ~3 companies in Europe basically control the global luxury handbag market — but for real!

Judge Rochon shoots back

After she heard the arguments from the Tapestry side, Judge Rochon pushed back against the notion that the accessible luxury handbag market was something to be dismissed.

Maybe she feels very strongly about her low-end handbag collection??

“Downplaying the importance of handbags as nonessential discretionary items that consumers can simply choose not to buy if the price is too high ignores that handbags are important to many women, not only to express themselves through fashion but to aid in their daily lives.”

Ridiculous to believe that a merger of these two entities would result in “too high” prices for handbags — and if the merger doesn’t happen then prices for handbags would somehow remain low..

POLITICS

It’s all politics. This is a real quote from the Bureau of Competition.

“Today’s decision is a victory not only for the FTC, but also for consumers across the country seeking access to quality handbags at affordable prices. These bags are a product which millions of people rely on throughout their daily lives. The decision will ensure that Tapestry and Capri continue to engage in head-to-head competition to the benefit of the American public.”

I can assure you, the American public did not jump out of bed this morning to news that the deal was blocked.

By the way, Compound248 wrote a good Twitter thread about the state of US antitrust here.

The job of a judge is to read the law in the way it meant to be read. Not twist words and meanings to create the outcome they were already looking for.

What happened was that the FTC succeeded in defining the “accessible luxury” handbag market very narrowly. And because the merged entity would have a high enough share of this narrow market for one to care, the judge just blocked the deal.

This ruling is considered a win for the Biden Administration, as it set out to promote competition across the economy in an Executive Order from 2021.

OFFSHORE

But enough about handbags, what about the real bagholders?..

Reports this week indicate that Transocean and Seadrill are in talks for a potential merger between the two.

It seems Transocean realises the position it put itself in with the staggering debt on their balance sheet — and is looking to Seadrill to delever their problems.

Seadrill is in net cash territory while Transocean has something like $7bln in debt.

A weak offshore market and a further weakening oil market smells trouble for offshore sector companies that absolutely need work for their imprudently debt-financed drillers. I made a video about the oil market if you’re interested.

—> I will do some work on Transocean and Seadrill to come up with how the yet un-announced merger would look like and how their collective fleets and balance sheet will be. Subscribe Now.

Ultimately, I think Transocean will have to concede a lot of ownership to merge with Seadrill — and the deal could fail because of this. Remember, Seadrill has time while Transocean has considerably less.

I suggested Transocean should look to SELL tonnage to fix its balance sheet in my piece from early last year. RIG is down 50% since.