The FTC filed a second request based on the Hart-Scott-Rodino Antitrust Improvements Act of 1976 as it relates to the TPR/CPRI deal. That basically means that the FTC is taking a look at the deal and its impact on the competitive environment. We’d argue that the second request procedurally was likely to happen, or the FTC isn’t doing its job, and the companies were likely prepared for some level of scrutiny. The initial outcome is that this delays the path to closing some. Whether it leads to actual action by the FTC to block it is yet to be determined. Roughly 1/3 of FTC second requests result in a complaint or litigation or consent decree, the other 2/3 see the investigation closed and FTC takes no action.
There are two pieces to whether there is any action on the part of the FTC to block the deal.
- First, what is the right way, or more importantly how will the FTC frame up the “market”? Acquiring your way to 30% or more share of a market is generally something the FTC would have an issue with. The market of relevance to be considered here is handbags. If the market is all handbags, then market share is around mid to high teens (no issue). If the market is higher priced handbags (say $200+) market share is around 30%, with other large players in the market including LVMH and Kering (probably no issue). If the market is a band of price point, say $200 to $550, then the share becomes probably around 60% to 70% (an issue).
- Second, are there market players that would have an issue with this encouraging the FTC to act and is this likely to be a deal that the FTC wants to dedicate its limited resources to trying to stop? Here we struggle to see what makes this a deal worth stopping. The retailers likely benefit with better product segmentation and less discounting. TPR is highly likely going to reduce wholesale distribution, opening up some shelf space for competitors at similar prices points. We’re not sure of some other “public good” to be concerned with on market power of high priced handbags (there’s no price gouging to be concerned about when you are paying for a brand name, and there are hundreds of lower priced alternatives).
Ultimately the announcement is a net negative, but not something we think derails the deal. The path to closing will take longer, and the companies will have to work with the FTC to address any issues. We still think the odds favor this deal closing. We're Long CPRI and Short TPR.
