Analyzing Coty’s segments
Procter & Gamble’s (PG), or P&G’s, proposed 43-brand merger deal with Coty (COTY) would more than double the combined entity’s revenue base. Coty clocked sales of $4.6 billion in fiscal 2014. The new entity is projected to have sales of $10.5 billion on a pro forma basis.[1. Based on P&G’s 43 beauty brands revenue and Coty’s revenue for the year ending June 2014]
Market leadership in fragrances
The deal would also make Coty the worldwide leader[1. Market share data based on company information, Euromonitor estimates] in the fragrances business, ahead of L’Oréal (LRLCY) (OR.PA) and LVMH Moet Hennessy Louis Vuitton (LVMUY) (MC.PA).
Fragrances are already Coty’s largest segment. Fragrances would account for 44% of the combined entity’s total sales or ~$4.5 billion in pro forma sales. A significant portion of the expanded portfolio would consist of premium brands including Calvin Klein (PVH), Gucci, and Hugo Boss, among others.
Coty’s Vision 2020 envisaged certain goals for each of its three segments. The proposed 43-brand merger with P&G adds valuable scale to Coty’s businesses, besides fulfilling its goals on a strategic level. It will also provide diversification away from its fragrances business as well as providing market leadership.
Color cosmetics profitability
The combined P&G–Coty color cosmetics portfolio, would see the new Coty become the number three company in color cosmetics, with $2.5 billion in pro forma global sales. It would rank behind only L’Oréal and Estée Lauder (EL).[3. Market share data based on company information, Euromonitor estimates]
The addition of drugstore brands Max Factor and CoverGirl also brings depth to its color cosmetics portfolio. Besides, the color cosmetics category appears to be P&G’s most profitable of the categories proposed for merger. It accounted for 19% of sales and 28% of EBITDA (earnings before interest, taxes, depreciation, and amortization) in fiscal 2014.[2. After considering the impact of $400 million in costs that will not be transferred to the new entity] Read more on the income statement benefits to Coty in Part 6 of this series.
Hair care brands benefit
The addition of hair care brands Wella, Clairol, and Vidal Sassoon, which were formerly absent from Coty’s product offerings, provide further diversification advantages. P&G–Coty will become number two in the world in hair salon products, with $1.5 billion in annual pro forma sales. These products will account for ~24% of sales in the combined entity. L’Oréal will continue to be the market leader.[4. Based on company information, Kline data, and estimates]
L’Oréal, Estée Lauder, and LVMH Moet Hennessy Louis Vuitton together constitute ~0.3% in the portfolio holdings in the iShares MSCI ACWI ETF (ACWI).