The $12.5 Billion Sale of Beauty Brands Could be the Herald of a New Era for P&G

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Procter & Gamble

Last week, global consumer processed goods behemoth Procter & Gamble (NYSE:PG) announced the sale of 43 of its beauty brands to Coty Inc. for a mammoth $12.5 billion. With this one masterful stroke, P&G got rid of a big chunk of brands with low growth potential, curtailed its presence in a business that lies outside the company’s core expertise, and raked in a massive one-time gain of $5-$7 billion in the process. With the brand consolidation program as well as most non-core brands out of P&G’s way, the new financial year starting this July could well be the beginning of a new, more profitable era for the company.

The $12.5 billion transaction will be structured as a Reverse Morris Trust for affecting a tax-efficient sale. The brands sold to Coty include professional hair care brands like Wella, cosmetics brands like Covergirl and Max Factor, fragrances brands like Hugo Boss, Gucci and Dolce & Gabbana, and other hair styling brands. It is worth noting that P&G has not sold some of its billion-dollar brands like Pantene, Olay and SK-II, which suggests that the company will not fully exit the beauty business, as we previously hypothesized.

Our price estimate of $78 for Procter & Gamble is about 5% lower than its current market price.

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See our complete analysis for Procter & Gamble here

P&G is Monetizing Brands It Doesn’t Want

The size of the transaction allows P&G to convert numerous brands to small for it to support to ready cash, now that it has found both a ready buyer and welcoming home for them in Coty. P&G fortunately finds itself in this very position, since the 43 brands sold as part of the deal are brands with low growth potential. More importantly, P&G has stated on numerous occasions that it finds itself out of depth in the beauty business. [1]

Therefore, the latest transaction not only lets P&G gainfully divest non-core, low-growth brands, it will also allow the company to return to its core strengths from the next financial year. The value of not having to allocate resources to businesses outside P&G’s core expertise should not be underestimated. P&G will now compete in select product categories with its best-performing brands, putting it in a better position in the highly competitive consumer processed goods industry. Therefore, a gradual but steady increase in P&G’s market share in the remaining product categories like Baby Care, Family Care, Feminine Care, Fabric Care, and Home Care is very likely in the medium term.

Shareholders Come Out Ahead

In the short term, P&G’s shareholders are the clear winner in this transaction. The 43 brands being sold generated revenues of almost $6 billion in fiscal 2014, which is 7% of P&G’s total revenue. [2] Despite this, non-GAAP EPS is expected to remain unaffected over the long term. This is because the impact of lost revenues is expected to be fully offset by retirement of shares as part of the deal, and reduction in overhead costs. However, a dilution of $0.02 to $0.03 is expected in the period before closing the transaction due to transitional expenses.

Therefore, P&G’s shareholders are expected to benefit from not just the return of value in the short term, but also a likely appreciation in the value of P&G’s shares as the company embarks on a new path.

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Notes:
  1. P&G Conference Call at the Consumer Analysts Group of New York, February 19, 2015 []
  2. Coty buying P&G beauty business for $12.5 billion, Reuters, July 9, 2015 []