According to Futu Securities, due to the Federal Trade Commission (FTC) attempting to block the merger of handbag retailers Tapestry (TPR.US) and Capri (CPRI.US), Tapestry will defend its plan to acquire Capri Holdings for $8.5 billion in court on Monday. Capri Holdings is the parent company of luxury brands such as Michael Kors, Versace, and Jimmy Choo.

The two parties will debate in front of Judge Jennifer L. Rochon in the United States District Court for the Southern District of New York, and the trial is expected to last for a week and a half. Rochon stated during the pretrial hearing last Friday that the two parties will have 20 hours to present their defense.

Cabot Henderson, the M&A arbitrage strategist at Jones Trading, stated in an interview, "It's really hard to imagine that either party has a clear advantage. Overall, the FTC has done well in their arguments by utilizing the internal communications of the two companies, but at the same time, the legal briefs have pointed out loopholes in the government's market definition and economic analysis."

In April of this year, the Federal Trade Commission filed a lawsuit to block the handbag deal, claiming that it would eliminate competition between Coach, Kate Spade, and Michael Kors, especially in the "affordable luxury" market.

Henderson added, "Overall, I lean heavily towards the FTC's case of preventing the merger between the two companies, as it would have a very concerning impact on future mergers of large direct competitors, and the notion that Tapestry has true lasting market power seems to be incorrect."

Tapestry and Capri believe that the FTC's definition of the "affordable luxury" market is not a relevant market, as handbag retailers have been competing with hundreds of other handbag manufacturers and new entrants.

Tapestry's lawyers stated in a document last month that "evidence will show that no pricing level of handbags is relevant to this case, that is, if there are not hundreds of them, consumers do not have dozens of alternatives to choose from." "If a brand tries to raise prices without increasing the value in the eyes of consumers, consumers will 'defeat' the price increase by simply turning to one of the hundreds of choices."

Investors seem to have little confidence in Capri's ability to win, with its stock price currently at $34.77, down 40% from the $57 per share deal it reached with Tapestry in August 2023. Over the past year, Capri's stock price has also been hit due to disappointing performance and prospects that have disappointed Wall Street.

"Frankly, the extent of the poor performance they reported was disappointing and surprising, especially when it comes to profitability and cash flow," said Tapestry CFO Scott Roe last month on the second quarter conference call.

Some investors are concerned that Tapestry may try to renegotiate the price of acquiring Capri, especially given the disappointing financial results. These concerns may now be unfounded as the trial is scheduled for Monday.

At least one well-known investor believes that Tapestry has an advantage in the trial. A letter seen by the media shows that David Einhorn's Greenlight Capital disclosed last month that the hedge fund had reestablished its position in the stock because the Capri stock price was "substantially" discounted from the $57 per share deal.

"After reviewing the complaint from the Federal Trade Commission and the responses from Capri and Tapestry, we believe this challenge may be defeated in court later this year," Greenlight said in the letter.

As for the detrimental effects on Capri if the deal is ultimately blocked, UBS estimates the company's standalone value at $15 without the deal, while Citi has lowered it to $24. Baird analyst Mark Altschwager believes that without a deal, Capri's standalone value will be around $21-26.