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 Coty would become the No. 1 perfume maker ahead of L'Oreal and No. 3
make-up provider behind its French rival and Estee Lauder. It would
run the perfume licenses of Gucci, Hugo Boss and Dolce & Gabbana as
well as make-up brands Cover Girl and Max Factor, more than doubling
its size with combined sales of more than $10 billion.
The deal comes as Coty's sales across categories have either been
stagnating or declining for more than two years while P&G has been
struggling to expand its beauty business.
Coty shares fell 4.6 percent, while P&G slipped 0.4 percent as
investors questioned the benefits of the mega-merger.
"We are getting critical mass around the globe with access to key
markets such as Brazil, Japan and Mexico," Coty Chairman and Chief
Executive Bart Becht said in an interview on Thursday.
Analysts said the mass beauty brands Coty is set to acquire is
expected to do well in emerging markets due to low pricing but the
company has to invest in new initiatives to revive growth in
developed markets.
"The deal is extremely transformative for Coty, but investors are
uncertain of what this means for the company," retail research firm
Conlumino's Chief Executive Neil Saunders said. The debt Coty will
assume, fairly small savings and questions on how it will cope with
the transition make investors nervous, he said.
Coty said the deal would save $550 million, including $400 million
in non-transferred overhead costs, but take on $2.9 billion of P&G
Beauty' debt.
But Coty's stock is still up about 17 percent from before Reuters'
June 8 report that it was fighting rivals such as Henkel for P&G's
beauty business and had submitted a bid for the P&G assets.
The sale is part of P&G's plan to narrow its focus on fewer,
faster-growing brands. The world's No. 1 household products maker
said last year it could sell about half of its slow-growing brands.
The 43 brands being sold generated sales of $5.9 billion, or 7
percent of P&G's total revenue in fiscal 2013/14, and adjusted
income of $1.15 billion.
By taking on P&G's hair brands Wella and Clairol, Coty is entering a
whole new business, which ranked No. 2 in terms of market share.
On a call with analysts, P&G said it prefers to execute the deal
through a "Reverse Morris Trust" split off transaction in which its
shareholders could exchange P&G shares for those of Coty and the new
beauty businesses.
However, if it is executed as a split-merge, P&G would establish a
separate entity to hold these beauty brands which would be
transferred to electing P&G shareholders in a tax efficient
transaction. There will also be a simultaneous merger of the new
entity with Coty.
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P&G said it expects to close the deal in the second half of calendar
2016 pending regulatory approvals.
P&G shareholders would own 52 percent of the combined business while
Coty's existing shareholders will own 48 percent.
Coty shareholder JAB Holdings, the Luxemburg investment company of
the billionaire German Reimann family, will own a third of the
combined entity.
BECHT'S BETCoty has gone through a painful three-year reorganization
with departures by many top executives and marketing veterans.
Becht, who will be running the combined business, said Coty would
take on all of P&G's Wella and Clairol management teams as Coty had
no experience in that sector.
The company expects hair color products to account for 24 percent of
total sales after the deal was completed.
P&G's 10,000 employees will join Coty's 9,000, Becht said.
P&G's beauty chief Patrice Louvet will not be part of the new
entity, Becht noted. P&G refused to comment on specific management
moves related to this deal.
P&G estimated a one-time gain of $5 billion to $7 billion, depending
on the value of the merger at closing.
Goldman Sachs advised P&G, while Morgan Stanley was lead adviser for
Coty.
(Reporting by Astrid Wendlandt in Paris and Siddharth Cavale in
Bengaluru; Writing and additional reporting by Nandita Bose in
Chicago; Additional reporting by Ramkumar Iyer and Yashaswini
Swamynathan in Bengaluru; Editing by Saumyadeb Chakrabarty and
Richard Chang)
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