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

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

Coty Inc. (NYSE: COTY) announced on Thursday the signing of a definitive agreement to merge Procter & Gamble Co (NYSE: PG)'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) (OTC: LRLCY)'s annual revenue is around $25 billion while Estee Lauder Companies Inc (NYSE: EL)'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.

Latest Ratings for COTY

Jun 2020StifelMaintainsHold
May 2020Morgan StanleyMaintainsEqual-Weight
May 2020Exane BNP ParibasDowngradesOutperformNeutral

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