When Coty Inc. unveiled a deal for the company’s professional division, Wall Street analysts seemed to have expected the company to sell the entire thing.
That would have allowed Coty to reduce leverage as well as operational complexity, which were two of the company’s key talking points when it said it had hired Credit Suisse to explore options for the segment in October.
Instead, the proposed deal — which is not yet final — has KKR taking a 60 percent stake in a joint venture, with Coty holding the other 40 percent. While the brands involved, Wella, OPI, Ghd and Clairol, will be ultimately carved out and put into the KKR-controlled joint venture, Coty will still have a level of operational involvement under terms of a temporary service agreement, as well as a minority owner, sources said.
The deal is complex, and as one source put it “confusing” — and Coty’s stock has paid the price. Shares had dipped nearly 40 percent since the deal was unveiled, as of press time.
“The longer people have sat with the deal and dug into the details, it has become less comfortable, not more,” said Jefferies analyst Stephanie Wissink.
“It’s probably a good deal for both, but obviously they — they as in Coty — are doing it because they have to, as opposed to want to,” said Stifel analyst Mark Astrachan.
“The capital majority is owned by KKR, but the operating partnership relies on Coty’s ability to continue to own and operate that business as a minority partner. This doesn’t actually simplify, de-complexity, slenderize the business. It does from a financial org chart perspective, it makes it a minority position in a business, but you still have operational responsibility to see it through,” Wissink said.
Coty insiders contend that the deal will still allow the company to focus on core categories and turn around the operation, which has struggled, particularly in the mass market, since the 2016 acquisition of Procter & Gamble’s beauty portfolio.
Peter Harf, Coty chairman and founding partner at Coty majority owner JAB provided an exclusive statement of deal support to WWD: “KKR’s investment and partnership will significantly strengthen Coty’s balance sheet, and by carving out Wella, Coty will become a more focused and agile business that is positioned to capture top-line growth in the next phase of this economy.”
Coty’s chief operating officer, Pierre-André Terisse, said in a statement to WWD that when the deal closes, “Coty will carve out Wella into a stand-alone company, with its own separate governance structure … board of directors, [chief executive officer], executive committee … thereby allowing us to dedicate our resources to growing our fragrance, cosmetics and skin-care businesses.”
But analysts still cast doubts over Coty’s future, noting that the company is under-penetrated in China relative to beauty peers, and won’t be allowed to make major acquisitions for about a year under the terms of an amended credit agreement, meaning it’ll have to work with the brand portfolio on hand.
As Coty works to reinvigorate the remaining business during a global pandemic, the business is also aiming to finalize the KKR agreement by the end of the month, with closing in six to nine months. The PE firm is also providing a $750 million cash infusion, and Coty has said it will begin a multiyear, $700 million, cost-restructuring initiative.
And add in yet another layer of complexity in terms of management changes — incoming ceo Pierre Denis assumes his role in June — and the picture is far from clear. “You’re doing all of what’s going on right now with a new ceo coming in,” said Astrachan, “which obviously complicates things even further.”
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