Tapestry (TPR; Baa2/BBB; double Neg) Capri 1Q Results (follow up)
Capri equities closed down -4.9% at $30.5. Technically the forward FY25 EPS revision (-20% on bbg consensus) leaves the prob. of deal closing higher (biggest mover for TPR bonds).
In reality this situation is getting more uncertain and equity px action is being masked by the likely M&A arbs parked in the risk eyeing the asymmetric upside (+87%). TPR results on Thursday in US pre-market. If it is weak too then serious questions on this acquisition will emerge. Only support we see from Capri results is TPR can show the FTC falling market share to water down competition concerns.
Even after close, TPR longs will be left taking on a co that is not far off their own size ($6.5b vs. $5b sales) but mid 5-turn levered (vs. TPR low 2x), facing HSD falling sales and running 10% (!) lower margins. Synergies likely to be the keyword used by TPR to push any concerns away for now. We are less convinced and move our FV's on close higher and in particular steepen the 27/31s to reflect the poor Capri results. We have limited the FV moves width to reflect the 25bp/rating notch (Moody's or S&P) step-ups on both lines (up to 200bps).
- 27s upside/downside on cash px is -2.4/+1.3pts or (ex. carry) has a 65% prob. of deal closing priced.
- 31s upside/downside on cash px is -3.2/+3.3pts or (ex. carry) has a 49% prob. priced.
- CPRI equities at $30.5 has a 36% prob. priced.
Above subject to change after TPR results on Thursday. Reminder carry no longer protects anyone from total return losses given timing to a FTC decision (mid Sept to late Feb).