President Joe Biden’s antitrust enforcers face a new test in a Manhattan courtroom Monday as they push to scuttle an $8.5 billion fashion industry deal in Tapestry Inc.’s proposed acquisition of Capri Holdings Ltd. 

The companies are fighting the US Federal Trade Commission’s bid to block their tie-up, which would marry Tapestry’s Coach, Kate Spade and Stuart Weitzman brands with Capri’s Michael Kors, Versace and Jimmy Choo labels. It’s the first fashion industry challenge under Chair Lina Khan as the FTC has worked to sink a raft of mergers in sectors from tech to groceries, with mixed results.

Among the investors watching the legal battle closely are Wall Street’s merger arbitragers, who bet on whether a deal will live or die. Most arbs currently give Tapestry and Capri a better-than-even chance of closing the transaction. David Einhorn’s Greenlight Capital is among those betting the merger will go through. 

The FTC claims the combination, announced a year ago, would eliminate “direct, head-to-head competition” between the brands, raising prices on handbags and accessories. It’s asking the judge to slap a preliminary injunction on the merger, freezing it until the agency’s own, in-house trial can proceed. That would effectively kill the deal, as the FTC trial and appeal process could take months or even years.

“This is the show,” Capri lawyer Jonathan Moses told the judge in a court conference ahead of the hearing. “This is the case where it will be decided whether this merger goes forward.”

The case is the latest court challenge to a proposed merger under Biden’s stepped-up approach to antitrust enforcement. The government has suffered some high-profile losses, including a challenge to Microsoft Corp.’s $69 billion acquisition of Activision Blizzard Inc. — a defeat that handed juicy returns to arbs that bet the deal would prevail. 

The FTC has had some wins, too, including in its suit against Illumina Inc.’s purchase of the startup Grail. A federal court in Portland, Oregon, is currently considering the agency’s bid to block a $24.6 billion deal to combine the Kroger Co. and Albertsons Cos. supermarket chains. 

The Tapestry hearing, a sort of mini-trial to last less than two weeks, is expected to include testimony by the two companies’ chief executive officers as well as by hired experts and witnesses with experience in the handbag business. It will be the first antitrust trial for US District Judge Jennifer Rochon, a Biden appointee who took the bench in 2022. She’s a former general counsel for Girl Scouts of the USA.

The outcome will turn partly on how the court looks at the “accessible luxury” handbag category, in which competition on price, discounting, design, marketing and store experience is the fiercest, according to the FTC. That’s where the threat posed to consumers — and to the jobs of the companies’ own employees — is most acute, the agency argues, saying the merger would put more than half the market under one roof. 

The combination would create the fourth-largest luxury company in the world and second-largest in the Americas after LVMH, according to research firm GlobalData. Analysts at TD Cowen led by Oliver Chen define accessible luxury handbags as costing $150 on average and estimate the size of the US market at $10 billion to $15 billion. Looking at the companies’ biggest brands, Coach has an 11% share of that market, while Michael Kors has 9%, the analysts estimate.

Lawyers for Tapestry and Capri will go after the FTC’s definition of that market, in which they say they face competition from hundreds of brands sold in stores and online, and that the economic barriers preventing new companies from entering the handbag marketplace are modest. 

The agency filed an in-house administrative claim against the merger in April, when it also sued in federal court. The hearing is for Rochon to determine whether the FTC is likely to prevail in the administrative trial.  

Investors handicapping the case give the companies that better-than-even chance based on the wide but narrowing gap between Tapestry’s takeover offer and Capri’s stock price. Over the past month, Capri shares have climbed to around $35, moving closer to the $57-per-share bid, as traders snapped up the stock with the make-or-break hearing coming down to the wire. 

The market is pricing in a roughly 50% to 60% probability that the deal will go ahead, according to a Bloomberg calculation. The tally is based on the downside estimate that the shares will drop to the high teens or mid-20’s if it fails, according to a Bloomberg survey.

If the deal falls through, investors are concerned about the outlook for Capri. Amid a broader industry slowdown, the company has repeatedly reported weaker-than-forecast earnings since the merger was announced. 

As for Tapestry, it would have to rethink its growth strategy by continuing to focus on expanding its three brands — or by seeking another acquisition.