UBS, Credit Suisse Upbeat On Coach After Kate Spade Deal

Two research firms - UBS and Credit Suisse - were upbeat on Coach's (COH) acquisition of Kate Spade (KATE). Under the deal, which was announced yesterday morning, handbag and accessory maker Coach will acquire its rival for $2.4B in cash, or $18.50 per share. UBS: The transaction makes sense for Coach from a strategic perspective, wrote UBS analyst Michael Binetti. The deal will allow Coach to improve Kate Spade's international business and supply chain, while shutting down a number of Kate's underperforming offerings, Binetti explained. Additionally, Coach can exploit the favorable views that most millenials have towards Kate Spade to convince them to pay higher prices for its products, the analyst stated. Coach's estimate of $50M in synergies between the two companies is conservative, added Binetti, who kept a $49 price target and a Buy rating on Coach shares.

CREDIT SUISSE: Coach will be able to apply its "effective distribution model" and "sales discipline" to Kate Spade, wrote Credit Suisse analyst Christian Buss. While Buss says that acquiring Kate Spade will enable Coach to bring Kate's products to Asian markets and target younger consumers, he is concerned about Coach's emphasis on "the challenged handbag category and U.S. distribution." Moreover, he thinks that the deal could "create revenue dis-synergies in the short-term," while it may be years before Kate Spade's international growth becomes meaningful. Nonetheless, he increased his price target on Coach to $55 from $46 and kept an Outperform rating on the stock.

WHAT'S NOTABLE: Wells Fargo downgraded Kate Spade to Market Perform from Outperform in the wake of the deal. While a higher bid for Kate Spade could emerge, the stock's risk/reward ratio is "balanced" at current levels, the firm stated.

PRICE ACTION: In morning trading, Coach added about 2% to yesterday's roughly 5% gain, while Kate Spade rose fractionally to $18.42.

Disclosure: None.

OTHERS TO WATCH: Many others in the retail sector are lower this morning, including Macy's, Kohl's, American Eagle, ...

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