Handbag maker Coach Inc (COH.N) said it would buy Kate Spade & Co (KATE.N) for US$2.4 billion as it looks to tap the popularity of its smaller rival's quirky satchels and totes among millennials.

The US$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 US$18.34 in morning trading on Monday, while Coach was up six per cent at US$45.25.

Kate Spade's shares have risen 17 per cent since Dec. 27, a day before the first report that the company was looking to sell itself.

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

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

Coach's deal for Kate Spade makes perfect sense: Analyst

Laura Champine, Senior Analyst, ROE Equity Research joins BNN's Michael Hainsworth for a look at why she believes Coach's deal for Kate Spade made sense.

"(Kate Spade) allows us to go after a new customer segment," Coach Inc Chief Executive Victor Luis said on a conference call.

Luis said Kate Spade's popularity among millennial consumers, not only in the United States but also in Europe and Asia, was what Coach found attractive.

About 60 per cent of Kate Spade's customers are millennials, Coach said. Kate Spade gets about 15 per cent of its sales from outside North America.

In tune with Coach's turnaround strategy, which includes limiting discounts and distribution to regain its brand cachet, the company will cut back Kate Spade's sales to department stores and curb online flash sales while expanding the brand's presence in Asia and Europe.

Analysts called Kate Spade a good fit for Coach.

"We like the complementary product assortments, complementary customer bases, potential for synergies," Robert W. Baird & Co analyst Mark Altschwager wrote in a note.

COACH IN THE MARKET

Coach, which has been looking for an acquisition for months, said it expects to save US$50 million in savings within three years of the closing the deal.

The deal comes two months after Kate Spade said it was exploring strategic options. Hedge fund Caerus Investors had urged the company in November to sell itself citing the management's inability to achieve profit margins comparable to industry peers.

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

The deal, which is not subject to any financing condition, is expected to close in the third quarter of 2017 and add to adjusted earnings in fiscal 2018.