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Coty CEO Shift Underscores Merger Integration Troubles

The business has appointed Pierre Laubies ceo and Peter Harf chairman, while Camillo Pane, former ceo, and Bart Becht, former chairman, have shifted out of those roles.

Coty Inc. has undergone a rapid leadership swap.

Pierre Laubies, the former chief executive officer of coffee and tea business Jacobs Douwe Egberts, is now ceo, and Peter Harf, who ran Coty as ceo between 1993 and 2001, is now chairman. Erhard Schoewel has been appointed lead independent director, and the company has started the process of appointing two independent board members.

Pierre Laubies
Pierre Laubies, Coty ceo. Courtesy

Laubies’ and Harf’s appointments replace former ceo Camillo Pane, who joined the business in 2016 upon Coty’s acquisition of 41 beauty brands from Procter & Gamble, and former chairman Bart Becht, respectively. Pane is said to have resigned for personal reasons. Becht, who is a partner and chairman at Coty minority shareholder JAB, will remain on Coty’s board. JAB owns about 38 percent of Coty.

The leadership changes, which do not include transition periods, took Wall Street by surprise.

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“The swiftness of the appointment suggests discussions may have been going on for a number of weeks and when known, may have also factored into the outgoing ceo’s decision to leave so quickly,” wrote Jefferies analyst Stephanie Wissink in a research note.

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“It suggests that not only is JAB unhappy with Mr. Pane’s performance as ceo, but also that it is disenfranchised with Mr. Becht’s chairmanship. We find this especially notable as Mr. Becht is one of three senior partners at JAB, along with Mr. Harf and Olivier Goudet, and the architect of the beauty brands merger with P&G, which so far has been value-dilutive to Coty shareholders, including JAB,” wrote Stifel analyst Mark Astrachan in a note.

The shifts follow the resignation of former Coty chief financial officer Patrice de Talhouët, who left the company in September.

The news comes shortly after Coty reported sharp dips in sales for most of its business segments, which it said were mostly because of back-end disruptions. Some disruptions were part of the P&G brands’ integration, but others were caused by Hurricane Florence and component shortages from external suppliers.

Becht was the visionary behind Coty’s acquisition of the P&G specialty beauty portfolio, and was said to be leading the integration charge while Pane focused on increasing sales — something he had a proven track record of doing from his previous post at Reckitt Benckiser, where Becht was once ceo and JAB is a shareholder. But challenges in Coty’s Consumer division, which includes Cover Girl, Clairol and Rimmel, were greater than expected, and the segment has yet to turn around. In the most recent quarter, the Consumer division posted a more than 20 percent sales decline, to $828.8 million. Both the Luxury and Professional segments have fared better.

Laubies is thought to be a capable consumer packaged goods leader. He has a track record that spans Mars, as well JDE, where he successfully integrated the Mondelez coffee business and reduced the company’s debt burden.

During its latest quarter, Coty revealed an increased debt burden of 5.8 times its net debt to adjusted earnings before interest, taxes, depreciation and amortization ratio for the last 12 months, up from 5.3 times in the prior-year period. S&P downgraded Coty’s rating Monday and issued a negative outlook, citing the possibility that Coty’s performance may continue to be “hampered” by supply-chain consolidation and it may continue to struggle to stabilize the Consumer beauty segment.

It remains to be seen if Laubies is up to that task.

“Coffee is not cosmetics,” said one analyst in an interview. “There are still some elements of this industry that are very unique. These executives find out really fast that you can’t just take assumptions around scale and power-brand positioning as the drivers of profitability enhancement in this industry.”

“The deviation in the beauty category from traditional CPG may prove to be the incoming ceo’s greatest challenge, even beyond the synthesis of operational strategies,” said Wissink.

Laubies, like Pane, came from inside the JAB network. “In beauty, you should probably have a bit of an understanding of the beauty category, otherwise the learning curve is steep,” said Astrachan. “It’s too bad they don’t have anybody that runs a beauty business internally.”

“The transition also increases the chance that the board could push for broader strategic actions, but we believe options could be limited near-term given Coty’s current high leverage,” wrote Wells Fargo analyst Joe Lachky in a note.

Analysts were curious to see if JAB buys more Coty shares — if the firm does, they said, they’d view it as a sign of long-term support.

Astrachan said the leadership shift likely means there are no imminent plans for JAB to take Coty private — something he’d see as a positive — but that he would “find it incredibly disappointing if JAB did not immediately begin buying shares in open market transaction in support of the long-term opportunity in the business.”

“Coty would be better off as a private company where you can fix the problems without the public markets knowing, and then bring it back to the public markets after the problems have been fixed. One reason they’re public is because it allows them to use their equity as currency to do more deals, but given the current stock price and debt levels, they are in a difficult spot to do either of those,” Astrachan said.

Other analysts echoed his interest in JAB share purchases.

“With the stock now well below the 2013 IPO price of $17.50, we are a bit surprised that JAB has not stepped in to increase its stake in the company,” said Citi analyst Wendy Nicholson.

“In recent months, with significant operational underperformance versus expectations, changes in leadership, and stock devaluation, it’s less clear if JAB’s support is growing or waning,” wrote Wissink.

Coty’s stock rose on the executive shake-up, closing up slightly at $8.65.