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Coty Wins 3 Auctions for P&G Beauty Brands: A Win-Win Deal?

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Procter & Gamble to divest three businesses for $12 billion

According to a June 15 article in the New York Post, Coty, Inc. (COTY) has won three auctions to purchase some of Proctor & Gamble’s (or P&G) (PG) beauty brands. The businesses include several of P&G’s beauty, hair-care, and fragrance brands. Coty reportedly won the auctions for the P&G divestitures for an estimated $12 billion.

P&G’s sale to Coty could include perfumes by Hugo Boss, Dolce & Gabbana, and Gucci. It may also include cosmetics brands such as CoverGirl and Max Factor and hair-care brand Wella. The two companies, however, haven’t confirmed the divestitures yet.

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Paying for scale

While P&G may have found a buyer for its three lines of business, there’s a lot of difference in scale and operations between buyer and seller. P&G is one of the world’s largest fast-moving consumer goods (or FMCG) companies, with a market cap of more than $216 billion. Coty is about 5% of P&G’s size with a market cap of ~$11.5 billion as of June 23, 2015.

If the deal goes through, the $12 billion brand purchase will just about double Coty’s value. It will catapult the company closer to the likes of Estée Lauder (EL) in terms of scale. EL has a market cap of ~$33.2 billion and reported revenue of $10.9 billion in the trailing 12 months.

At the same time, it will be interesting to see how this potential deal is financed.

Procter & Gamble (PG) is a consumer staples stock. It’s the top holding in the Consumer Staples Select Sector SPDR Fund (XLP) with 11.9% weight. The SPDR S&P 500 Trust ETF (SPY) has 9.5% of its holdings invested in consumer staples stocks, including PG.

In this series, we’ll analyze the various components of a potential deal and the implications for the two companies.

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