Coach owner Tapestry acquiring Michael Kors owner Capri for $8.5B

Tapestry, the parent of Coach, will acquire Capri, parent of Michael Kors and Versace, in a deal valued at $8.5 billion.

Why it matters: The deal creates a U.S. luxury conglomerate with $12 billion in sales and $2 billion in adjusted operating profit.

Details: The deal is expected to close next year, creating a company that will encompass the brands Coach, Kate Spade New York, Stuart Weitzman, Versace, Jimmy Choo and Michael Kors.

By the numbers: Capri's investors will receive $57 per share under the terms of the deal, compared with yesterday's close of $34.61.

• The $8.5 billion enterprise value is about 9x adjusted EBITDA on a trailing-12-month basis.
• The combination could result in up to $200 million worth of cost-cutting synergies on an annual basis within three years.
• Tapestry has secured $8 billion in fully committed bridge financing from Bank of America and Morgan Stanley.

Of note: A combination of senior notes and term loans, along with cash, is expected to finance the deal, providing a syndicated debt market starved for new issuance with a much needed infusion.

• Tapestry said it is committed to an investment grade rating and will prioritize paying down debt to reduce its leverage ration below 2.5x EBITDA within 24 months of the deal's closing.
• It's a big win for sell-side investment bank Barclays.

Flashback: A number of apparel conglomerates have dismantled in the previous decade, such as L Brands, Liz Claiborne and the Jones Group along with a decline in the middlebrow department stores and malls they sold through.

• Not so for luxury conglomerates such as LVMH, Kering and Richemont, which continue to make billions for their owners.

💭 Our thought bubble: The larger luxury platform could eventually be positioned to absorb other brands such as Ralph Lauren and PVH's Calvin Klein and Tommy Hilfiger.