With eye on millennials, Coach buys Kate Spade for $2.4 billion

Handbag maker Coach Inc (COH.N) said it would buy Kate Spade & Co (KATE.N) for $2.4 billion 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 $18.35 before the opening bell on Monday.

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The shares have risen 17 percent since Dec. 27, a day before the first report that the company was looking to sell itself.

Kate Spade said in February it was exploring strategic options, after hedge fund Caerus Investors urged the company to sell itself citing the management's inability to achieve profit margins comparable to industry peers.

Kate Spade's handbags have been a hit with millennials due to their subtle logos and their quirky and colorful designs, including bags shaped like cats and cars.

See Kate Spade's quirky handbags below:

But the company, like other luxury handbag makers, has struggled to live up to market expectations amid fierce competition and a drop in traffic to department stores.

Coach has been looking for an acquisition for months, according to reports, as it looks to turn around its business in the anemic handbag market.

Reuters reported in April, citing sources, that Kate Spade would need more time to negotiate a sale after receiving an offer from Coach.

Coach expects to have a run rate of about $50 million in savings within three years of the closing of the deal.

The $2.4 billion purchase price is expected to be funded half in cash and half in debt, Coach said. The deal is not subject to any financing condition.

The deal is expected to close in the third quarter of 2017 and add to adjusted earnings in fiscal 2018, Coach said.

Coach's financial adviser was Evercore Group L.L.C. and its legal adviser was Fried, Frank, Harris, Shriver & Jacobson LLP.

Kate Spade & Co's financial adviser was Perella Weinberg Partners LP and its legal adviser was Paul, Weiss, Rifkind, Wharton & Garrison LLP.

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