Loose Threads

The DOJ and the FTC love competition. The whole idea behind their anti-trust efforts is to encourage competition to benefit consumers. You'd expect the good civil servants that work there to be, you know, competitive. It's their job. It's their nature. It's their entire life's mission to promote competition!

For arcane historical reasons airline competition lands with the DOJ.

In mid-January, a Federal Judge in Boston sided with the DOJ and blocked the merger between JetBlue and Spirit. The ruling downed an airline deal for the first time in 40 years. It kept the sixth and seventh carriers from jumping up one whole spot to being the fifth largest US carrier and handling a less-than-monopolistic 9% of the US domestic passenger market. Not the strongest case. But, that was the ruling.

Between the merger announcement and the judgement — 19 long months — Spirit's business descended rapidly. It fell enough that JetBlue probably wasn't too upset that the DOJ shot down the deal. Perhaps not coincidentally, JetBlue's long-time CEO and architect of the deal left "for health reasons" shortly after the decision… and is now at another aerospace company.

In public, management insisted the "merger was worth pursuing."  But it wasn't worth it enough for them to appeal the decision.

Because they're competitive and the DOJ won, you might imagine, Lina Kahn — head of the FTC — took Jonathan Kanter — head of the DOJ anti-trust division — out for a celebratory drink to be a good sport.

"I can't believe you won," Lina opens.

"I know, I wasn't even working the case." Jonathan laughs. "One of my underlings had to run it. Conflicts of interest are a bear."

"Your case was so weak" Lina shakes her head.

"Hey. We won. Our case couldn't have been that weak. JetBlue didn't even appeal." Jonathan says.

"C'mon, JC, they didn't appeal because Spirit started tanking right after they announced the deal. JetBlue should be buying your drink. You did them a favor. Spirit's business was falling apart at the seams, just like this stupid Jimmy Choo purse," she says reaching for her wallet. Then — "Wait, I have an idea. I bet you double or nothing I can block a merger with an even weaker case." Lina bolts out of the bar, back to the office.

A few months later…

In April, the FTC announced its own curious action to try to block the acquisition of Capri — peddler of $200 handbags — by Tapestry — also peddler of $200 handbags. Tapestry agreed to buy Capri for $57 per share late in 2023. Capri shares traded down to $35 after the FTC suit.

The merger would unite brands Versace, Michael Kors, Jimmy Choo — owned by Capri — with Coach, Kate Spade and Stuart Weitzman — owned by Tapestry — and might force wealthy and wealthy-adjacent women searching for drip to suffer harm from some luxury and luxury-adjacent-priced handbags becoming…maybe a bit more over-priced and still not being Hermes.

There are a lot of other brands to shop from. Capri's defense lists 150 of them, but it's not exhaustive.

The businesses — airlines and handbags — share little in common. The thread between them is the setup. Capri's business, like Spirit's, has fallen into accelerating decline since just about the moment the deal was announced.

If the FTC wins its case, Tapestry might, like JetBlue, look at how things have unfolded and decide "eh, maybe it's not so bad if we just let this one go," and not appeal the decision.

The Capri/Tapestry merger agreement will expire on its own next February. If the FTC loses, it can appeal. An appeal would likely take the deal past the expiration date. At that point, Tapestry might also say "hmm, this is a big headache for a struggling business, let's go put AI in our handbags instead," and also walk away.

So, if the FTC wins: no deal. If the FTC loses: also maybe no deal.

Now, this isn't what will happen. Lamplighter has no crystal ball into that, but the JetBlue/Spirit episode provides a fresh example of how the companies might behave in a situation with similar stitching.

No deal and also no deal aren’t the only two outcomes — it’s still possible that, the deal, you know, closes and Capri shareholders get $57 per share. Maybe this is still the most likely outcome. But it seems less likely by the day as CPRI results trail off and the merger expiration inches closer.

Another outcome is that the deal could also go through, but at a lower price or a much lower price. So, while Capri shares offer an enticing 40% discount to the deal price today, if it closes, there's a decent chance the deal follows the path of Spirit into disappointment. At that point, it might be a better investment just to buy a new handbag rather than shares.

Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.