P&G Set to Sell $12 Billion Worth of Its Beauty Brands to Coty

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Leading consumer processed goods manufacturer Procter & Gamble (NYSE: PG) is one step closer to a tax-free sale of some of its beauty brands valued at $12 billion. Coty Inc., which owns popular fragrance brands like Calvin Klein and Marc Jacbos, has reportedly won the auction to acquire some of P&G’s hair care, fragrances, and cosmetics brands. [1] If the deal goes through, it will rid P&G of popular brands like Wella and Clairol hair care brands, Gucci and Hugo Boss fragrance brands, and Max Factor and Cover Girl cosmetic brands. [2] These are not necessarily loss-making or declining businesses, but P&G is selling them off because, according to the company, they do not conform to its core strengths. On the other hand, the acquisition of these brands will provide Coty an instant surge in its market share in the fragrances, hair care, and cosmetics businesses.

The transaction is reportedly to be structured as a Reverse Morris Trust, under which P&G will sell slightly less than a majority stake to Coty. Operationally, the transferred brands will fall under Coty’s sole purview upon successful completion of the transaction. A Reverse Morris Trust structure will help P&G avoid a hefty capital gains tax on the $12 billion sale. However, the deal is yet to be fully finalized and certain aspects may change before the official announcement, which is expected in the next few weeks. [2]

As we postulated earlier, P&G may lose revenues of $3 billion to $6 billion as a result of the sale. P&G’s market share in the global Skin Care and Makeup, Hair Care, and Fragrances markets may also take a hit following the sale of the aforementioned major brands. For instance, P&G’s hair care business had revenues of $9 billion in 2014, of which Wella accounted for at least $1 billion. [3] We estimate that P&G’s market share in the global hair care market stood at over 22% in 2014. Following the sale of the Wella brand, its hair care market share will fall under the 20% mark, which is a level not breached even once in the last 7 years.

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This loss of market share is acceptable to P&G because it is aiming to reduce its presence in the beauty business. However, it will be interesting to see how the brand divestitures impact the EBITDA margin of P&G’s beauty business, which stood at 20.4% in 2014. This was the lowest EBITDA margin of all P&G’s divisions in 2014, but was still among the highest EBITDA margins in the beauty industry. [4] If the Max Factor and Cover Girl brands, which are being sold to Coty, had comparatively low EBITDA margins, the overall EBITDA margin of P&G’s beauty business could improve even further in the near future.

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Notes:
  1. Coty Inc. acquires beauty product lines from P&G for $12B, New York Post, June 15, 2015 []
  2. Coty on track to clinch P&G beauty deal in coming weeks, Reuters, June 16, 2015 [] []
  3. P&G 2014 Annual Report []
  4. 2015 Q1 Beauty Care M&A Report, Intrepid Investment Bankers []