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Procter & Gamble’s Beauty Brands Sale: Advantage Coty

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Coty’s benefits in the beauty brands sale

In the last article, we talked about why a potential brands sale from Procter & Gamble (or P&G) (PG) to Coty (COTY) may make strategic sense for P&G.

Now let’s look at how Coty will benefit by acquiring these brands. Coty’s primarily a beauty products company. Its portfolio consists of fragrances, color makeup, and skin and body care products. P&G’s brand divestitures are core to Coty’s business. The deal is likely to lead to several cost and distribution synergies for Coty.

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Fragrances

Fragrances are Coty’s major line of business and its top grossing segment. Fragrances brought in $2.5 billion in revenue in fiscal 2014, which ended June 30, 2014. This was 54.9% of Coty’s total revenue.

Coty has licensing agreements for several brands, including Calvin Klein (PVH), Marc Jacobs, Chloe, and Davidoff. The Calvin Klein line of fragrances is Coty’s largest brand in terms of sales.

P&G’s fragrances business includes premium brands like Hugo Boss, Dolce & Gabbana, Gucci, and Lacoste. Coty has fragrances in its portfolio ranging from premium to mass market. A possible acquisition of P&G’s perfumes business will help Coty diversify its brand offering. Coty’s top ten power brands, including all three segments, accounted for 72% of sales in fiscal 2014.

Color makeup

Coty’s color makeup segment includes brands Sally Hansen, Rimmel, OPI, and others. Coty has also been trying to diversify its portfolio to reduce its dependence on the fragrances business.

Coty’s color makeup segment faced competitive headwinds last fiscal year, particularly in nail care. It’s banking on its color makeup segment to help achieve portfolio diversification away from fragrances. Acquisition of one or more of P&G’s hair-care brands will also help fulfill this objective.

Coty (COTY) is part of the portfolio holdings for the First Trust Consumer Discretionary AlphaDEX ETF (FXD). FXD has 2.2% of its holdings invested in personal products companies. Coty is also part of the iShares Russell 1000 ETF (IWB). IWB has 8.7% of its holdings invested in consumer staples companies, including peers Procter & Gamble (PG), Avon Products (AVP), Estée Lauder (EL), and Nu Skin Enterprises (NUS).

The next article analyzes the impact of P&G’s proposed beauty brands sale to Coty.

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