Swallowing an extra 10,000 employees as part of a landmark acquisition deal seems like a mighty large gulp for any company to take.
But that will be the case a year from now when Coty Inc. absorbs 43 brands from Procter & Gamble, representing an additional $5.9 billion in 2014 sales. Preliminary reaction from the market to the $12.5 billion deal suggests the influx of talent could be more of a benefit than a burden.
“It’s something they can take advantage of in terms of types of people that they can get,” said Ali Dibadj, analyst at Sanford C. Bernstein & Co. “The quality of the P&G management team is quite good. It is just that the weight of Procter & Gamble [management] central didn’t necessarily let people do what they are best at.”
Carrie Mellage, vice president of consumer products at the Kline Group, added that “Coty should be smart to retain the staff that comes with these businesses.” Noting that there’s a “good team at Wella,” she said that when Coty acquired the OPI nail-care salon brand three years ago, key staffers were kept on the job. The same should be done now since Coty does not have experience running a global professional hair business.
When the acquisition plan was disclosed last Thursday, Bart Becht, chairman and interim chief executive officer of Coty Inc., said staffers now working on those brands will make the transition to Coty.
Becht has a strong reputation for operational skills, based on his more than a decade’s experience leading Reckitt Benckiser.
While analysts generally applauded the Coty/ P&G deal, the beauty firm’s mass market retailers remember the firm’s previous management and weren’t quite so confident. They questioned whether Coty has the infrastructure in place to reinvigorate the P&G properties, particularly since it hit speed bumps on the selling floor with the past purchases of brands whose businesses were unfamiliar. The assimilations of Del, OPI and Philosophy were described by retail executives as “rough.”
But now a new product line from the old Del umbrella, Sally Hansen’s Miracle Gel, is the hero of the company, on the way to hitting $100 million in sales, according to industry sources, and gaining a 19 percent market share.
Still, at least for now, the retailers seem to be in the minority in their reaction to the deal. Despite Coty’s shares falling by almost 5 percent the day the acquisition was unveiled, analysts generally are bullish about the transaction.
Dibadj at Bernstein & Co. said the deal with Coty is “a very good step in the right direction. We wish it were more meaningful and we wish it were happening faster,” he said. Dibadj pointed out that P&G is holding onto two of the biggest brands in its beauty portfolio, Olay and Pantene, which both need rejuvenation.
He was much more upbeat about Coty’s prospects since “I’ve seen them do extraordinarily well on different brands and businesses. They certainly can improve the business. It’s not going to be easy because [the brands] have been so undermanaged.”
In a research report, Mark S. Astrachan, analyst at Steifel Nicolaus, described the deal “as highly favorable to Coty, more than doubling current sales, earnings before interest, taxes, depreciation and amortization profits and free cash flow.” The report also maintains that expected increases in earnings per share and deal synergies are “conservative, especially considering overlap and economies of scale in certain acquired businesses.”
But the report warns that sales growth “is likely to remain below” the global norm while Coty reinvests without any certainties of success. In addition, there are risks involved in integrating new talent into the organization.
Javier Escalante, executive director of Consumer Edge Research, issued a note predicting that Coty stock will underperform because sales growth will trail the industry for three or four years due to a cost-cutting strategy that “leaves little room for reinvestment” that is critically needed. As for P&G, William B. Chappell, analyst at SunTrust Robinson Humphrey, said the company got a good price while holding onto significant brands and reducing the complexity of the overall business.