By Sruthi Ramakrishnan
(Reuters) - Handbag maker Coach Inc said it would buy Kate Spade & Co for $2.4 billion (1.85 billion pounds) as it looks to tap the popularity of its smaller rival's quirky satchels and totes among millennials.
The $18.50 per share offer in cash represents a premium of 9 percent to Kate Spade's Friday close. Kate Spade's stock was trading at $18.36 on Monday, while Coach's shares were up 5 percent at $44.80.
Kate Spade's shares have risen 17 percent since Dec. 27, a day before reports emerged that the company was looking to sell itself.
Kate Spade's handbags have struck a chord with millennials due to their subtle logos and quirky and colourful designs, including bags shaped like cats and cars.
But the company, like other luxury handbag makers including Coach, has struggled to live up to market expectations amid fierce competition and a drop in traffic to department stores.
Coach Chief Executive Victor Luis downplayed the slowdown in the handbag market.
"Our strongest belief is that middle class will in Europe, in (the) U.S. and especially in developing markets provide us tremendous opportunity," Luis told Reuters.
He is banking on Kate Spade's appeal with millennials.
"We are very excited that Kate Spade has strength with the millennial consumer, we see that not only through their sales but their online engagement."
About 60 percent of Kate Spade's customers are millennials, Coach said. Kate Spade gets about 15 percent of its sales from outside North America.
In tune with Coach's turnaround strategy, which includes limiting discounts and distribution to regain its brand cachet, the company will cut back Kate Spade's sales to department stores and curb online flash sales while expanding the brand's presence in Asia and Europe.
Analysts called Kate Spade a good fit for Coach.
"We like the complementary product assortments, complementary customer bases, potential for synergies," Robert W. Baird & Co analyst Mark Altschwager wrote in a note.
Coach is obtaining a powerful brand at a reasonable price, Cowen & Co analyst Oliver Chen said.
COACH IN THE MARKET
Coach, which has been looking for an acquisition for months, said it expects $50 million in savings within three years of the closing the deal.
The deal comes two months after Kate Spade said it was exploring strategic options. Hedge fund Caerus Investors had urged the company in November to sell itself, citing the management's inability to achieve profit margins comparable to industry peers.
Last month, Reuters reported that Kate Spade would need more time to negotiate a sale after receiving an offer from Coach.
The deal, which is not subject to any financing condition, is expected to close in the third quarter of 2017 and add to adjusted earnings in fiscal 2018.
Coach's financial adviser was Evercore Group and its legal adviser was Fried, Frank, Harris, Shriver & Jacobson LLP.
Kate Spade was advised by Perella Weinberg Partners LP, while Paul, Weiss, Rifkind, Wharton & Garrison LLP was its legal adviser.
(Reporting by Sruthi Ramakrishnan in Bengaluru; Editing by Saumyadeb Chakrabarty and Maju Samuel)