October 22, 2019

Breakingviews: Coty tries regurgitation cure for indigestion

by Breakingviews.

Coty is trying regurgitation as a cure for indigestion. The perfume firm said on Monday it might sell some of the beauty brands it bought in 2015 from Procter & Gamble for $12.5 billion. Offloading a unit that includes the professional lines of Wella and Clairol would make the troubled firm easier to manage and reduce its burdensome debt pile. But the U-turn by the company – and owner JAB – makes the long-term strategy harder to decipher.

The P&G purchase overwhelmed Coty. The combined firm sells perfumes, shampoo, beauty appliances, and nailcare products to both high-end and mass markets around the world. The integration did not go smoothly, as logistics woes left retailers with empty shelves last year, hitting sales. The deal wasn’t any easier financially. A series of poor quarters hit the stock, and the debt load of more than $7 billion weighed heavy.

Selling its Professional Beauty business, which accounts for about 20% of sales, would reduce logistics and managerial woes. Rival Estee Lauder is valued at 4.5 times the revenue generated in the past 12 months. If the unit could fetch the same multiple, that would result in a price of around $8 billion. Selling or divesting its Brazilian operations might add to this total. That would be sufficient to bring net debt down from over 5 times EBITDA to a more comfortable level, and perhaps leave extra capital to return to shareholders. That’s one reason Coty’s shares popped nearly 15% on the news.

Yet outsiders may have a hard time figuring out the company’s strategy. The mantra today is more focus, but just a short while ago it was all about growth and expansion. What owner JAB, the Luxembourg-based holding company of Germany’s Reimann family, ultimately wants is also unclear. JAB floated Coty in 2013 for $17.50 per share. Earlier this year, JAB paid $11.65 per share to raise its stake from 40% to 60%. Like Coty, JAB has gone on an investment binge, spending more than $80 billion on assets such as Dr Pepper Snapple, Panera Bread and Pret A Manger, since 2013 according to Refinitiv data. Overall, results have been uneven, in large part because of Coty’s troubles.

The new emphasis on focus should be good for the company – as long as the firm, and its owner, stick to this new discipline.


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