P&G inks $12.5B cosmetics deal with Coty
CINCINNATI — Procter & Gamble announced on Thursday a definitive agreement to merge 43 of its beauty brands with Coty. The transaction includes P&G’s global salon professional hair care and color, retail hair color, cosmetics and fine fragrance businesses, along with select hair styling brands.
“This represents a significant step forward in the work to focus our portfolio on 10 categories and 65 brands that best leverage P&G’s core competencies. We have leading global brand positions in these categories, consumer preferred products and leading brands in the largest markets. These businesses and brands have historically grown faster and have been more profitable than the balance. We expect these ten categories to grow and create value as we focus the energy and resources of the company exclusively on them,” stated P&G chairman, president and CEO, AG Lafley, in a statement announcing the news.
The beauty brands, or RMT Brands, included in the transaction are Wella Professionals (and its sub-brands), Sebastian Professional, Clairol Professional, Sassoon Professional, Nioxin, SP (System Professional), Koleston, Soft Color, Color Charm, Wellaton, Natural Instincts, Nice & Easy, VS Salonist, VS ProSeries Color, Londa/Kadus, Miss Clairol, L’image, Bellady, Blondor, Welloxon, Shockwaves, New Wave, Design, Silvikrin, Wellaflex, Forte, Wella Styling, Wella Trend, Balsam Color, Hugo Boss, Dolce & Gabbana, Gucci, Lacoste, bruno banani, Christina Aguilera, Escada, Gabriela Sabatini, James Bond 007, Mexx, Stella McCartney, Alexander McQueen, Max Factor and Covergirl. The transfer of certain fragrance brand licenses from P&G to Coty are subject to licensor consent.
For Coty, the transaction gives the beauty company a new category in the beauty industry through the addition of P&G’s hair color business, led by Wella and Clairol. It will also significantly expand Coty’s geographical footprint, providing scale in large beauty markets like Brazil and Japan, while also increasing critical mass in important geographies in which Coty currently operates, such as in North America, Europe, the Middle East and Asia.
“With the beauty talent from both sides and the fantastic portfolio of world-class brands, we have the opportunity to create a highly focused, pure-play leader and challenger in beauty which can deliver exciting opportunities and benefits for employees, licensors, customers and suppliers. There is no question that with the broader offering of leading brands, strong brand support, the development of a better pipeline of innovative products and the much broader geographical reach and scale, Coty will strengthen its competitive position and ability to capitalize on revenue and profit growth opportunities over time. Additionally, our combined operational and financial platform will allow us to drive meaningful EPS accretion and generate substantial incremental free cash flow over the long term, giving us a strong balance sheet with a conservative leverage profile. All of this has the potential to lead to accelerated value creation for Coty shareholders,” stated Bart Becht, chairman and interim CEO of Coty.
Becht will oversee a management team, including Coty CFO Patrice de Talhouët, together with a broader leadership organization consisting of executives from both businesses. The board of directors will not change as a result of the transaction.
Based on fiscal year 2014 results, Coty and the P&G Beauty Business would have more than $10 billion in combined pro forma revenues, doubling the size of Coty.
Although a final decision has not been made on the form of deal, P&G stated that it expects to do a split-off or spin-off transaction. P&G’s current preference is for a Reverse Morris Trust split-off transaction in which P&G shareholders could elect to participate in an exchange offer to exchange P&G shares for shares of Coty. P&G shareholders would have the option of exchanging all, some or none of their P&G shares. If executed as a split-merge, P&G would establish a separate entity to hold the RMT Brands, which would be transferred to electing P&G shareholders in a tax-efficient transaction with a simultaneous merger of the new entity with Coty.
P&G expects to finalize the details of the transaction in the coming months and to close the transaction in the second half of calendar year 2016, pending regulatory approvals.
Based on Coty’s current stock price and outstanding shares and equity grants, the value of the transaction is approximately $15 billion. The value is comprised of approximately 413 million shares, or 52% of the diluted equity of the newly combined company, valued at approximately $13.1 billion and the assumption of $1.9 billion of debt by the entity holding RMT Brands. The assumed debt will vary between $3.9 billion and $1.9 billion, subject to other contractual valuation adjustments, within a $22.06 to $27.06 per share collar based on the trading price of Coty’s stock prior to the close of the transaction. The final value of the transaction will be known at closing based on Coty’s stock price, Coty’s outstanding shares and equity grants, and the amount of assumed debt.
According to P&G, the tax-efficient nature of the $12.5 billion offer maximizes value for P&G shareholders and minimizes annual earnings dilution. The transaction will result in a one-time earnings gain that will be recorded at closing of the transaction. P&G currently estimates the one-time gain will be in the range of $5 billion to $7 billion, depending on the final deal value at the time of closing.
Beginning with fiscal year 2015-16 reported results, the earnings from the RMT Brands will be reported as discontinued operations (i.e. removed from core earnings per share) in both the current and prior year periods. The specific earnings amount to be restated will be provided at a later date.
The core earnings per share impact of lost RMT Brands profit is expected to be completely offset on an annualized basis following the closing of the transaction through a combination of shares retired via the deal structure and offsetting overhead costs that were previously absorbed by the RMT Brands. The company reiterated its goal of reducing non-manufacturing enrollment by 25% to 30%, excluding the impact of divestitures, by the end of fiscal year 2017 compared with its June 30, 2011 base. Including divestitures, total overhead enrollment reduction will exceed 35%.
The company expects core earnings dilution of approximately 2 cents to 3 cents per share in the period prior to closing related to transition activities necessary to establish the RMT Brands entity. The majority of transition costs incurred by P&G related to the transaction will be reported in discontinued operations.
Coty expects to realize approximately $550 million in total cost savings on an annualized basis over the next three years, including the $400 million in non-transferred costs and an incremental $150 million in additional cost synergies, equating to 10% of the acquired revenues. These savings, together with working capital improvement and growth prospects anticipated from the creation of a focused beauty player, is expected to drive material financial improvements. Coty anticipates incurring one-time costs of approximately $500 million related to the transaction, plus an additional $400 million of capital expenditures, over the next three years. Excluding the impact of transaction amortization, the combined pro forma increase to Coty’s FY15 earnings per share base is approximately 33 cents to 39 cents, including the assumed three year implementation of full run-rate synergies. At the close of the transaction, Coty expects to increase its annual dividend to 50 cents per share.
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Dan Mack is the Founder of the Mack Elevation Forum and the author or “Dark Horse: How Challenger Companies Rise to Prominence.” To learn more go to mackelevationforum.com.