Tapestry-Capri merger blocked: market consolidation is out of vogue

A proposed merger between US fashion giants Tapestry, Inc and Capri Holdings has been blocked by the Federal Trade Commission (FTC), the antitrust regulator in the US, reflecting current regulatory attitudes to market consolidation across the globe.  

The US$8.5 billion merger of handbag and accessories maker Tapestry, Inc, owner of iconic brands including Coach, Kate Spade and Stuart Weitzman, and Capri Holdings, the parent company behind fashion houses like Versace, Jimmy Choo and Michael Kors, was called off this month, after the FTC sued the companies to prevent the transaction proceeding.

The FTC alleged that merging Tapestry-owned brands with Capri’s would substantially lessen competition in the market for accessible luxury handbags in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18.

In this case, the Court considered that the FTC presented ‘powerful quantitative evidence that the merger of Tapestry and Capri would result in the combined firm holding excessive market share and market concentration, thus establishing a presumption that the merger’s effects will be anticompetitive’. Under longstanding precedent, ‘a merger which produces a firm controlling an undue percentage share of the relevant market’ is 30 per cent of the market share or more. Post-merger, the Defendants combined estimated 59 per cent market share well exceeds the 30 per cent threshold.

In defending the deal, the companies argued (amongst other things) that handbags are nonessential items whose price consumers can control by simply not purchasing them if they increase in price. The Defendants argued that in their view, the FTC’s theory of the case was ‘completely divorced from the marketplace realities’. Further, the Defendants disputed that there is any such thing as “accessible luxury”, arguing instead that the FTC’s market definition is no more than “a very artificially curated selection of handbag brands”.

The ruling follows approval of the merger by regulators in Japan and the European Union earlier this year, and highlights the difficulties faced by international brands seeking to complete transactions that require regulatory approval in multiple jurisdictions. That is, approval of a deal in one jurisdiction is no guarantee it will be approved in other jurisdictions.

Similar considerations would be likely to apply in an Australian context, given the Competition and Consumer Act 2010 prohibits mergers that are likely to substantially lessen competition. The ACCC has repeatedly expressed its concerns about mergers which result in market consolidation, or which increase or entrench a dominant player’s position. In particular, the ACCC has recently been focused on ‘roll-up’ strategies and serial acquisitions of PE firms, which enable firms to achieve a position of substantial market power and erode competition in that market.

Lessons for fashion companies and PE firms include:

• a tailored approach needs to be adopted in each jurisdiction for global deals;
• PE companies should assume roll ups will be scrutinised by the ACCC; and
• merger reforms are coming – see our article, ‘Merger reform: will you need to notify your deal under the new regime? Will it get blocked?’.