By Savyata Mishra and Ananya Mariam Rajesh
(Reuters) -Tapestry is terminating its $8.5 billion deal to buy Michael Kors-owner Capri following a legal hurdle, the companies said on Thursday, ending their effort to create a U.S. luxury giant to compete with major European players.
The deal would have brought six brands under one roof: Tapestry (NYSE:TPR)'s Coach , Kate Spade and Stuart Weitzman; and Capri's Versace, Jimmy Choo and Michael Kors. But regulators sued to block the deal earlier this year, citing anti-competition concerns.
The merger was blocked last month after the U.S. Federal Trade Commission (FTC) argued that it would eliminate head-to-head competition between the top two handbag makers and create a massive company with the power to unfairly raise prices.
The companies said on Thursday they mutually agreed that ending the merger agreement was in their best interest, as the outcome of the legal process was uncertain and unlikely to be resolved by Feb. 10, the deadline that was set for the deal.
Tapestry's stock rose more than 12% to a decade high of $57.47, as the company also announced a $2 billion share buyback.
Capri shares, however, reversed course to rise nearly 5% as company executives laid out a cost-cutting plan that includes trimming its workforce and shuttering some stores. The stock has lost nearly half of its value since a U.S. judge blocked the deal late last month.
CAPRI'S PLAN B
Capri executives also did not rule out the possibility of potential sale of its brands.
"We have always been open to conversations with any a company that has an interest in any of our assets," Capri CFO Thomas Edwards said on a call with analysts.
The company's executives also admitted to having made several missteps with its brands including price points higher than palatable by its consumers for the Michael Kors brand.
The company has reported several straight quarters of sales decline since the deal was announced in August last year.
"The merger has seemingly been a big distraction and has hurt Michael Kors' results," Morningstar analyst David Swartz said, adding that European luxury firms would be interested in Versace and Jimmy Choo once its results improve.
Some analysts had anticipated the deal to fall through despite President-elect Donald Trump's lenient stance on antitrust. Tapestry CFO Scott Roe told Reuters last week the election had no bearing on the judicial process.
Last week, Tapestry said it had halted its merger plans as it appealed the U.S. judge's decision.
"This is a clear victory for the FTC. Tapestry and Capri realized that the juice wasn't worth the squeeze given that they were unlikely to get regulatory approval before the deal expired in February," said Emarketer analyst Zak Stambor.
Tapestry said it does not expect any acquisitions in the near term and has agreed to reimburse Capri's expenses of about $45 million, incurred in connection with the merger.
Tapestry CEO Joanne Crevoiserat said the company plans to accelerate growth for its organic business and had "significant runway ahead." The company also raised its 2025 profit forecast last week.
Coach's Tabby handbags have gained traction among younger consumers, helping Tapestry to post gross margin growth for eight straight quarters.