Bill Gross sticks to wager on Michael Kors owner even as doubts linger on deal

Bill Gross is sticking with his wager on Capri Holdings Ltd. even as traders worry that a proposed takeover of the Michael Kors parent won’t win regulatory approval.

“I still like CPRI for a merger arb,” the co-founder and former chief investment officer of Pacific Investment Management Co. wrote in a post on social media platform X on Monday. 

The merger-arbitrage strategy involves betting on the outcome of corporate takeovers, in this case Tapestry Inc.’s August cash offer to buy Capri for $57 a share. The stock traded at about $50 on Tuesday, a roughly 12% discount from the offer by Tapestry, which owns fashion brands including Coach. It’s a signal that the market sees a decent chance that the $8.5 billion transaction will falter. 

Gross, who didn’t immediately respond to an emailed request for comment through a spokesperson, cited Capri as one of his “best bets” in arbitrage situations in an October outlook. 

However, the shares started to slide in November, falling as low as $46.59 intraday that month and blowing out the gap below the takeover offer to more than $10 — the widest since the deal announcement. 

The decline came as the Federal Trade Commission issued a request for additional information as part of a probe into the deal. Adding to the concern, Capri reported weaker-than-expected earnings as spending on luxury brands suffered, a backdrop that also led traders to reassess Capri’s standalone value.

At current levels, the market-implied probability of the deal succeeding is about 85%, according to Cabot Henderson, a merger-arb specialist at Jones Trading. The calculation is based on an assumption that the stock will drop to $28 to $29 if the merger fails, he said.

In October, Gross was confident in the merger. It’s in a “relatively safe industry,” unlike high-tech combinations that typically get tougher antitrust reviews, he said in an emailed response to questions at the time. He called it the best example of a sizable discount on a deal that might take six to nine months to close.

The former bond king said last year that merger-arb investments were attractive because their performance isn’t necessarily correlated with the economy or stock market. This week, he also called 10-year US debt “overvalued.”  

Several of the merger-arb wagers he pointed out last year panned out: the sale of video game-maker Activision Blizzard Inc. to Microsoft Corp.; Pfizer Inc.’s purchase of Seagen Inc.; and software maker VMware Inc.’s acquisition by Broadcom Inc.