P&G Accepts $12.5 Bln Offer To Merge 43 Beauty Brands With Coty

(RTTNews) - Consumer goods giant Procter & Gamble Co. (PG) agreed Thursday to merge its beauty business with perfume maker Coty, Inc. (COTY) in a Reverse Morris Trust deal valued at about $12.5 billion. P&G's beauty business includes salon professional, retail hair color, cosmetics and fine fragrance as well as select hair styling brands businesses that encompasses 43 beauty brands.

P&G's businesses include leading fragrance brands such as Hugo Boss, Dolce & Gabbana and Gucci and the color cosmetics brands Covergirl and Max Factor. It achieved revenues of $5.9 billion in the fiscal year ended June 2014.

The merger of the two companies beauty businesses is expected to create one of the world's largest beauty companies and a strong challenger in the $300 billion global beauty industry, with pro forma combined annual revenues of more than $10 billion.

"This represents a significant step forward in the work to focus our portfolio on 10 categories and 65 brands that best leverage P&G's core competencies. We have leading global brand positions in these categories, consumer preferred products and leading brands in the largest markets," P&G President and CEO AG Lafley said.

However, P&G noted that the final decision has not been made on the form of deal as to whether the separation will be a "spin-off" or a "split-off." It expects to finalize the details of the deal over the next few months and to close the deal in the second half of calendar year 2016, pending regulatory approvals.

P&G added that the final value of the deal will also be known at closing based on Coty's stock price, Coty's outstanding shares and equity grants, and the amount of assumed debt.

If executed as a Reverse Morris Trust or split-merger, P&G would establish a separate entity to hold the merged beauty brands, which would be transferred to electing P&G shareholders in a tax-efficient transaction with a simultaneous merger of the new entity with Coty.

Following the closure of the deal, P&G shareholders are expected to own 52 percent of all outstanding shares on a fully diluted basis, while Coty's existing shareholders would own 48 percent of the combined company.

The company said Coty Chairman and Interim CEO Bart Becht will oversee a management team of the combined entity, including Coty CFO Patrice de Talhouët, together with a broader leadership organization consisting of executives from both businesses.

At the close, Coty will assume $2.9 billion of debt of the P&G beauty business, and also refinance its existing debt.

The Cincinnati, Ohio-based maker of Tide detergents, Crest toothpaste and Gillette shaving razors also communicated its intention to pay dividends and retire shares worth up to $70 billion over next 4 years from fiscal 2016 to fiscal 2019.

P&G noted that the tax-efficient nature of the offer maximizes value for P&G shareholders and minimizes annual earnings dilution, with the deal resulting in projected one-time earnings gain in the range of $5 billion to $7 billion that will be recorded at closing of the deal.

The company also expects modest core earnings dilution of about $0.02 to $0.03 per share in the period prior to closing.

P&G said the earnings from the brands involved in the merger will be reported as discontinued operations beginning with he first quarter of fiscal 2016.

Together with P&G's businesses, Coty is expected to become the global leader in fragrances and significantly enhance its position in color cosmetics, while adding a new category in the beauty industry through the addition of P&G's hair color business, led by Wella and Clairol.

The deal will also significantly expand Coty's geographical footprint into large beauty markets like Brazil and Japan, while also increasing critical mass in important geographies where it already ooperates, such as in North America, Europe, the Middle East and Asia.

"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. We look forward to a successful transition and we will work together to maximize value for the shareholders of both companies," Lafley added.

Meanwhile, JAB Cosmetics B.V., the owner of all of the outstanding shares of Coty's Class B common stock representing about 97 percent of Coty's outstanding voting power, has granted the shareholder consent required in connection with the deal.

JAB will remain the largest individual shareholder, owning about 33 percent of the fully diluted shares outstanding at the close of the deal.

Looking ahead, Coty said it expects fiscal 2015 net revenue to be in line with the prior year on a like-for-like basis, and reiterates its prior guidance of adjusted earnings of between $0.95 and $0.98 per share.

In Thursday's regular trading session, PG is currently trading at $81.80, up $0.81 or 1.00% on a volume of 0.24 million shares, while COTY is trading at $28.85, down $2.57 or 8.03% on a volume of 0.50 million shares.