P&G, Coty Will Merge Some Brands: Here's What It Means

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Coty Inc.COTY
announced on Thursday the signing of a definitive agreement to merge
Procter & Gamble CoPG
's fine fragrance, color cosmetics, and hair color business into Coty through a tax-free Reverse Morris Trust transaction. Media reports in June suggested that Coty has been named the victor in the bidding process surrounding P&G's beauty product line. In a report published on June 16, Piper Jaffray analyst Stephanie Wissink suggested that the combination would transform Coty from a roughly $5 billion run rate revenue profile to nearly $10 billion. As such, the company would become among the largest companies in the world that operate in the beauty space. By comparison,
L'Oreal SA (ADR)
LRLCY
's annual revenue is around $25 billion while
Estee Lauder Companies IncEL
's revenue is nearly $11 billion. However, a Coty and P&G Beauty entity and the resulting lower product margins (55 to 60 percent versus L'Oreal's 71 percent and Estee Lauder's 80 percent) could "handicap" the trading multiple on a relative basis. The analyst said that Coty's profit increase from the new entity would come from revenue scale and the elimination of cost duplication. As such, the analyst maintained a Neutral rating on shares of Coty with a $24 price target as risk exists over the deal as its financing options may be "somewhat limited" with $3.5 billion in current debt. Nevertheless, the "sheer magnitude" of the deal could draw investor interest and shares could continue trading higher in the near-term.
Wells Fargo: Leadership Appointment ‘Critical'
Chris Ferrara of Wells Fargo commented in a note on June 23 that Bart Becht will remain Interim CEO of the company served as a sign that a deal is imminent. "The need for the steady, experienced hand of Mr. Becht is critical, in our view," Ferrara wrote. "This announcement is a positive in our view. It is another sign that a deal for a basket of P&G assets is imminent, and also suggests that Bart Becht will remain on for the foreseeable future." Shares of Coty were reiterated with an Outperform rating with no assigned price target.
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Posted In: Analyst ColorLong IdeasNewsM&ATop StoriesAnalyst RatingsMoversTrading IdeasBart BechtBeauty ProductsChris FerraraCosmeticsfragranceL'OrealPiper JaffrayReverse Morris TrustStephanie WissinkWells Fargo
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