Coty Inc. has turned to private equity giant KKR for support in the coronavirus storm.
The beauty firm said KKR will start by buying $750 million in convertible preference shares of the beauty company, gaining the right to take two seats on the company’s board.
On top of that, Coty is in late-stage, exclusive talks to sell KKR the majority of its professional beauty and retail hair businesses — including the Wella, Clairol, OPI and GHD brands — at an enterprise value of $4.3 billion, or 12.3-times earnings before interest, taxes, deprecation and amortization last year. Coty plans to keep a 40 percent stake in the businesses, which are collectively known as Wella and will operate on a stand-alone basis. Coty is retaining ownership of its beauty business in Brazil.
The Wella deal is expected to generate $3 billion in cash proceeds for Coty. And once the transaction is complete, KKR plans to invest another $250 million in Coty convertible preference stock.
All together, that brings Coty’s take to $4 billion — a vital boost in the COVID-19 shutdown. As of March 31, the firm had total debt of $9.4 billion and cash and cash equivalents of $1.3 billion.
The preference stock KKR is buying carries a coupon of 9 percent and will be convertible into Coty shares at $6.24, a 20 percent premium over the stock’s close on Friday of $5.20.
Investors seemed to be taking a wait-and-see approach, trading shares of Coty down 7.9 percent to $4.78 on Wall Street Monday, leaving the company with a market capitalization of $3.6 billion.
Pierre-André Terisse, chief operating officer and chief financial officer of Coty, told WWD that KKR has been “studying our business for a long time” and is “very convinced at the quality of the asset.”
Terisse said the “main preliminaries” of the Wella deal — including valuation and the main governance items — were already worked out and that the other details could be hammered out in the weeks ahead.
Coty also laid out a plan to cut its fixed costs by a quarter, or $700 million, over the next 30 months by “amplifying the turnaround plan across the organization,” touching on supply chain and other controllable fixed costs. More than two-thirds of the savings come on top of what the company envisioned with its original turnaround plan.
Terisse said once the KKR transactions go through, Coty will be “pretty much done” in terms of shoring up the company’s balance sheet and cutting costs.
That leaves the task of successfully operating the company, focused on fragrance, cosmetics and skin care, in a world still being reordered by COVID-19 — a trick almost every business is trying to work out.
“It’s unfolding in front of our eyes,” he said, noting that the company will still need to be tactical and extremely careful, while also taking care to listen to the consumer.
He noted that until recently, it was almost impossible to get one’s hair cut in France. Now the country is beginning to reopen, but bit by bit.
“Life is going to start again,” he said. “We know it’s not going to go from night to day, it’s going to be much more gradual.”
But the new world and the old world across the COVID-19 divide will be connected through a series of continuing industry themes — from the emphasis on sustainable practices and health-orientated products to the growth of e-commerce.
“Crises do not create trends, they accelerate trends and that’s really what’s happening now,” Terisse said.
That doesn’t mean life and business returns in the same way.
Terisse said supply chains would have to be reconfigured, with businesses relying more on local production. He pointed to how hospitals that would have normally bought supplies from China have found they can use 3-D printers to meet their needs and how that realization could make people see old processes with fresh eyes.
For now, Coty is still in the midst of the crisis and it’s just starting to show in its results. Fiscal third-quarter revenues fell 23 percent to $1.5 billion. Net losses widened to $271.6 million from $12.1 million a year ago. On an adjusted basis, losses tallied $61.7 million, down from year-ago earnings of $101.6 million.
But KKR is clearly looking beyond the most immediate numbers — which are very bad for almost every consumer company with stores closed.
“Coty is a leader in the attractive global beauty market with iconic brands, global presence and scale, and a strong track record of innovation and growth,” said Johannes Huth, partner and head of KKR EMEA. “We are excited to form this partnership to invest in Coty to support it through this period of unprecedented global uncertainty and allow it to emerge as a stronger, more agile business and to acquire a majority stake in Wella, a market leader with a strong portfolio of brands in the attractive professional hair market where we see significant opportunities to accelerate growth in partnership with its experienced leadership team. We look forward to working toward the establishment of a lasting and value-creating strategic partnership.”
The quarterly conference call marked one of the last outings of Coty’s chief executive officer Pierre Laubies, who is going to be succeeded by Jimmy Choo chief Pierre Denis this summer. Denis will be the beauty group’s third ceo in three years as Coty has struggled with market conditions and turmoil at its controlling shareholder, the Luxembourg-based JAB, owned by the Reimann family of Germany. Denis, from his time at Choo, would know JAB, which used to own the brand before it was sold to Capri Holdings Ltd.
Laubies thanked investors and analysts on the call and continued to tout Coty’s strengths, even in the face of the crisis.
“Despite the COVID-related pressure, we do see evidence of our turnarounds taking hold,” Laubies said. “Within the mass business, some of our key brands were able to take market share to end Q3. Rimmel, Max Factor and Bruno Banani all grew market share by 50 or more basis points in brick-and-mortar during March. On the e-commerce side of our business, we have seen sell-out trends accelerate as store closure and lockdowns were implemented. Similar to the Americas, we have seen particular e-commerce strength within the mass beauty category with some regions, such as the U.K. and EMEA growing in excess of 100 percent.”