Coach eyes $2.1 billion loans, senior notes in Kate Spade acquisition

By Devika Patel

Knoxville, Tenn., May 8 – Coach, Inc. said it has signed a definitive agreement to acquire Kate Spade & Co. for $2.4 billion, or $18.50 per share in cash, which will be funded by a combination of senior notes, bank term loans and approximately $1.2 billion of excess cash.

Coach has obtained $2.1 billion of committed bridge financing from BofA Merrill Lynch.

“This will be an all-cash transaction and is not subject to a financing condition,” chief financial officer Kevin Wills said on a conference call announcing the transaction on Monday.

“We anticipate using a portion of Coach’s excess cash, Kate Spade’s net cash and new debt financing to fund the acquisition.

“All of Kate Spade’s existing debt will be repaid at closing,” he said.

Wills said that the company has plans to replace the committed bridge financing it has in place with permanent financing in the form of $1.1 billion of term loans and $1 billion of senior notes, which will be used to eliminate the bridge financing.

“We have secured $2.1 billion of committed financing from BofA Merrill Lynch for this transaction.

“We anticipate putting in place permanent financing prior to closing and the maturities, terms and conditions of such will not be known until that time.

“We are targeting to issue $1.1 billion of term loans consisting of an $800 million six-month loan and a $300 million three-year loan and $1 billion of senior unsecured notes.

“This level of permanent financing will allow us to eliminate the committed bridge facility,” he said.

The company intends to pay down some of this new debt by the end of fiscal 2018, bringing its leverage levels down by a full turn after repaying the $800 million term loan with excess cash.

The company ended last quarter with about $1.9 billion of cash and also expects to expand its revolver by an additional $200 million.

“At closing of the transaction, we anticipate having total debt of $2.7 billion, inclusive of our existing senior notes.

“Within 12 months of the transaction, we expect to reduce leverage from approximately 2.2x at closing, on a debt to EBITDA basis, to about one turn lower by the end of fiscal year 2018 following the expected repayment of the anticipated $800 million six-month term loan with excess cash.

“Coach ended its fiscal third quarter with approximately $1.9 billion of cash and short-term investments.

“In addition, we plan to amend and extend our revolving credit facility, increasing [the] size from $700 million to $900 million.”

Wills said that the leverage will be kept to a “modest level,” and that the company expects it will generate “meaningful” cash flow to pay down the debt over time, keeping the balance sheet in check.

“It is important to note that our strong balance sheet and cash position enabled us to structure this deal on an all-cash basis, while keeping our leverage at a relatively modest level.

“Even with this transaction, we’re only levered at 2.2x on a debt to EBITDA basis, and while we’re not giving guidance today, we certainly expect to be able to generate meaningful cash flow in this business going forward and to de-lever over time.

“We are committed to maintaining a healthy balance sheet to give ourselves flexibility as we go forward,” Wills said.

The acquisition is expected to close in the third quarter of 2017.

Coach is a New York-based luxury leather goods company.

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