Coach has buyers at its heels - COH, KORS, MC & PP

Northern, WI 03/06/2013 (avauncer) - Buyers of handbags and heels manufactured by Coach, Inc (NYSE:COH) are being offered the biggest discounts compared to any other luxury brand. Michael Kors Holdings Ltd (NYSE:KORS), its biggest rival went public in 2011 which resulted in a loss of 17 percent in Coach’s shares. Though Coach has the biggest profit margins amongst other niche brands, the company that is worth $14 billion has been trading at only 13.6 times its earnings which are below what 96 percent of same-sized rival brands earn. Coach, Inc (NYSE:COH)’s current cash generation and valuation is sufficient to have it stand third amongst other companies in its niche segment in terms of free cash flow and this could be exactly what private equity firms could get attracted to.

Several suitors

Amongst others, LVMH Moet Hennessy Louis Vuitton SA (EPA:MC) and PPR SA (EPA:PP) may be the companies attracted to its margins and want the chance to take Coach beyond the American or Japanese markets. Close to 86 percent of the company sales had been generated from the latter. Coach, Inc (NYSE:COH) sells accessories such as shoes, purses, sunglasses and wristlets had peaked last year and then fell by 38 percent. The company has been facing tough competition from various handbag makes in the market such as Michael Kors Holdings Ltd (NYSE:KORS), Kate Spade by Fifth and Pacific and Tory Burch LLC. In January, Coach said that this last quarter 15 percent growth had been its first handbag market failure in North America.

Attractive catch

Against that, the Hong Kong-based $12 billion company, Michael Kors Holdings Ltd (NYSE:KORS)’s revenue growth had been four times faster the same quarter. At the moment, Coach is very vulnerable and a takeover cannot be ruled out stated the managing director of AIM&R, Albert Saporta, an alternative investment research firm. The fact that it is listed the lowest in the U.S as well as in Europe means that someone could move in for the kill. Coach, Inc (NYSE:COH)’s free cash flow, balance sheet as well as ROI capital may attract private equity bidders. As of Dec 29, in comparison to the $1.05 billion free cash flow that it had in the last 12 months it now has a total debt of $22.7 million.

Since Coach, Inc (NYSE:COH) has been facing a large amount of domestic pressure, being taken over by a private-equity buyer can go a long way in expanding its overseas base. Going private opens up a large number of possibilities and you can take an aggressive stand as far as growth is concerned and it can easily see a two or threefold rise. A prominent market analyst has stated that only an offer in the range of $65-$70 per share will get the shareholders and the Coach, Inc (NYSE:COH) management team really interested in a buyout.

Foreign buyers

Paris-based companies, Kekst &Co and PPR have both been tight-lipped about their intentions about a Coach buy-out, if any. The size of the deal is what will make the buyout a difficult one and there will potentially be very few buyers. The other downside to a takeover of this well-run company that happens to be running at a discount evaluation is that any private equity firm that does take it over will find it very difficult to make any kind of operational changes as the company has very high margins. However, there has been acceleration in mergers and deal values have been the highest since last quarter’s financial crisis.

Shares of Coach, Inc (NYSE:COH) went up by 1.66% to close at $50.10

Shares of Michael Kors Holdings Ltd (NYSE:KORS) went up by 2.11% to close at $60.52

Shares of LVMH Moet Hennessy Louis Vuitton SA (EPA:MC) went up 1.83% to close at $133.80

Shares of PPR SA (EPA:PP) went up by 1.87% to close at $176.80