P&G had been suffering from an over expanded portfolio, with many of its brands underperforming, leading to a series of disappointing financial results over the course of the past few years as annual revenues have stalled at around the $80bn mark.
In contrast, the much smaller Coty has continued to grow organically, with a number of successful bolt-on acquisitions that have helped raise its annual revenues beyond the $4bn mark.
With the addition of the new brands to the business, the company is expecting to see annual revenues more than double, with estimates putting the new annual revenue in excess of $10bn.
The deal includes leading fragrance brands such as Hugo Boss, Dolce & Gabbana and Gucci, which will only go to serve Coty’s strongest segment; while color cosmetics brands CoverGirl and Max Factor will certainly boost this business too, joining color cosmetics brands such as Rimmel, OPI, and Sally Hansen.
Has Coty puts itself in a vulnerable position?
Last Friday, the day after the merger was announced, Coty share prices slipped more than 2%, reflecting the fact that some investors may have misgivings over the deal.
The fall in share prices also coincided with an analyst from Wells Fargo releasing an investor note that the bank had lowered its investor rating for Coty that morning.
In a separate investor note from TheStreet ratings team, shares in Coty were given a ‘hold’ rating, stating: “The primary factors that have impacted our rating are mixed, some indicating strength, some showing weaknesses.”
The note went on to indicate that the company’s strength lay in historical revenue growth, whereas its weakness concerned premium valuation and higher debt management risk.
Although Coty is building on its existing expertise in color cosmetics and fragrance, the acquisition of the P&G hair color business remains unchartered waters for the company, which may be another concern for investors.
Furthermore, the company is also expanding in a number of significant new geographies where it has not previously had critical mass, including Japan and Brazil.
Meanwhile, P&G share prices rise
Conversely, share prices in P&G rose during trading on Friday, closing 0.26 cents up at $80.92, as investors reacted positively to the emergence of a leaner and more focused business, with a portfolio that is now more focused on the company’s top performing core brands.
In response to the sale, TheStreet rating for P&G shares was raised to a buy with a rating of B, with analysts pointing to increasing profit margins and a largely solid financial position.
For P&G the divestment marks the next step for the company as it looks to streamline its portfolio sand concentrate on core brands, defined as 10 categories and 65 brands.
“The merger with Coty, a strategic acquirer, will provide an excellent new home for these businesses and brands, as well as for the talented people who are operating them,” says P&G president and CEO, AG Lafley.
“We look forward to a successful transition and we will work together to maximize value for the shareholders of both companies.”