Bill Gross, co-founder and former chief investment officer of Pacific Investment Management Co., is standing by his investment in Capri Holdings Ltd., the parent company of Michael Kors, despite concerns over regulatory approval for a proposed takeover. Gross recently stated on social media that he still favors Capri for a merger-arbitrage strategy, which involves betting on the outcome of corporate takeovers.
Tapestry Inc., the owner of fashion brands such as Coach, made a cash offer in August to acquire Capri for $57 a share. However, Capri’s stock is currently trading at around $50 per share, a 12% discount from Tapestry’s offer. This discount reflects doubts about the likelihood of the $8.5 billion transaction.
Gross had previously identified Capri as one of his top investment opportunities in the arbitrage space. However, the stock price began to decline in November, dropping to as low as $46.59. As a result, the gap between the stock price and the takeover offer widened to over $10, the largest since the deal was announced. The decline in share price coincided with the Federal Trade Commission’s request for more information as part of its investigation into the deal. Additionally, Capri’s earnings were weaker than expected due to reduced spending on luxury brands, leading traders to reassess the company’s standalone value.
Despite these concerns, merger-arbitrage specialist Cabot Henderson from Jones Trading estimates that the market-implied probability of the deal’s success is around 85%. Henderson’s analysis assumes that if the merger fails, the stock price will drop to $28 to $29. Gross has previously expressed confidence in the merger, citing the fashion industry’s relative safety in terms of antitrust reviews compared to high-tech combinations. He sees Capri as an example of a significant discount on a deal that may take several months to close.
Gross has a track record of success with merger-arbitrage investments, as their performance is not necessarily dependent on the overall economy or stock market. He has achieved positive results with previous wagers on mergers such as Activision Blizzard Inc.’s sale to Microsoft Corp., Pfizer Inc.’s purchase of Seagen Inc., and VMware Inc.’s acquisition by Broadcom Inc. In addition, Gross has recently voiced his belief that 10-year US debt is overvalued.
Despite doubts surrounding the proposed takeover of Capri Holdings, Gross remains confident in his investment and is committed to his merger-arbitrage strategy. The outcome of the deal will undoubtedly impact Gross’s investment thesis and the overall performance of Capri’s stock.
Useful links: Wall Street Journal, Business Wire
