Versace's parent company may fall by 30%? Expert: If the merger with Tapestry fails, Capri will drop to $20

According to Zhitong Finance, experts in merger arbitrage have indicated that if the proposed $8.5 billion merger deal between luxury goods brands Versace, Michael Kors' parent company Capri (CPRI.US), and Coach's parent company Tapestry (TPR.US) fails to go through, the company's stock price could potentially drop by around 30% or more.

Previously, the Federal Trade Commission (FTC) in the United States filed a lawsuit on Monday to block Tapestry's acquisition of its fashion industry competitor, citing the elimination of "direct head-to-head competition" between the two luxury handbag manufacturers. Several antitrust lawyers have noted that the FTC's rare challenge to a high-end fashion industry merger could set a precedent for luxury goods deal regulation.

In a statement, the FTC mentioned that the merged company would have approximately 33,000 employees globally, potentially leading to wage and employee benefits reductions. The FTC stated: "The proposed merger could deprive consumers of the benefits of competition between Tapestry and Capri in pricing, discounts and promotions, innovation, design, marketing, and advertising."

For merger arbitrage traders, the challenge lies in determining which side will prevail in court, a result that may not be known for several months. Capri's stock price has been declining for the third consecutive day on Wednesday. Since the close of trading on Monday, the stock has dropped by about 6%, with the final trading price around $35.50, significantly lower than the $57 per share acquisition offer. Prior to the merger announcement in August, the stock was close to $35.

Over the past two quarters, Capri's disappointing performance has added complexity to traders' perspectives. A survey of 20 merger experts by institutions indicates that if the deal fails, Capri's stock price could fall to around $20 or lower, representing a 30% or more decrease from current levels. The potential price decline reflects respondents' views on the stock's value by the end of the year, with some expecting a clearer understanding of the merger's fate by then.

Since announcing its performance in August, Capri, which owns brands like Michael Kors and Versace, has reported earnings below expectations twice, raising concerns about its performance in the coming quarters. The company's next financial report is set to be released in May. Tapestry owns brands such as Coach, Kate Spade, and Stuart Weitzman FBN Securities' merger arbitrage strategist Brian Lombardi said, "Capri's breakthrough price is a moving target, which makes judgment more complex when there is a long time left in the trading."

For him, the potential downside is around $22, but he believes that based on the FTC complaint and signs in its statement, the odds of the two companies winning in court are decreasing. For merger arbitrage traders, determining the stock price decline is key, as they hope to profit by betting on the likelihood of the deal being completed while monitoring the performance of the relevant companies. In the recent Microsoft (MSFT.US) acquisition of Activision Blizzard (ATVI.US), traders bet that the stock price will further decline, in part because the outside world holds an optimistic view of the target's business.

In the survey, 12 respondents believed that Capri's decline would be between $20 and $25, depending on indicators such as expected earnings per share and price-earnings ratio. Some respondents lowered their expectations on Tuesday. However, previously, Kering SA, the parent company of its largest brand Gucci, warned that profits in the first half of this year would decline, indicating a dim outlook for consumer spending on luxury goods. Four respondents believe there will be a higher breakthrough price, rising from $26 to $30, while two believe it could go as high as $33. Two respondents are much more pessimistic, expecting the price to drop to the teens.