KKR has agreed to inject $750m into debt-laden cosmetics maker Coty in the first step towards a broader deal that would see the US private equity group buy a majority stake in the company’s professional beauty and haircare division.
The companies on Monday announced a “strategic partnership” that sets out a path to a deal that must be finalised in talks between the two companies and Coty’s majority owner, the investment vehicle JAB.
The plan is the latest in a string of moves by Coty and its backers at JAB to turn round the company, whose biggest brands such as CoverGirl have lost favour with consumers who are flocking to new, often celebrity-driven rivals.
Coty is much smaller than cosmetics leaders L’Oréal and Estée Lauder and, given its heavy debts, operational problems and constantly rotating cast of executives, it has been unable to keep up with rapid changes in the market.
The announcement on Monday set out a plan in which Coty’s professional beauty division, which includes Wella, Clairol, OPI and ghd brands, would be spun out into a separate company. KKR would own a 60 per cent stake and Coty 40 per cent of the new business, which would have an enterprise value of $4.3bn, the companies said. Coty said this transaction would result in $3bn in cash payments flowing back to it.
If the transactions are completed, a total of $4bn in cash payments will be made to Coty, which will be used to cut its $8.1bn debt load in half. KKR would also emerge as Coty’s second-biggest shareholder with an up to 17 per cent stake and two board seats.
Last October, Coty launched the auction of its beauty and haircare division, hoping to raise about $8bn, people close to the process said at the time. Unilever and Henkel, as well as private equity firms, were weighing bids just as the Covid-19 pandemic hit, shutting down hair and beauty salons and upending equity and debt markets.
But Coty and its backers at JAB pushed ahead with the auction, and with the KKR plan are betting they have found a way to pull off a deal. KKR will first inject $750m in preferred equity into Coty and a further $250m if the two sides finalise the agreement to sell the professional beauty unit.
Coty will pay a 9 per cent coupon to KKR under the terms of the preferred equity, which can be converted into common shares when Coty’s stock price reaches $6.24. If exercised, KKR will own as much as 17 per cent of Coty’s shares and all other shareholders will be diluted.
Upon its conversion, JAB’s stake of about 60 per cent would be reduced but it would continue to own a majority stake in Coty. Shares in Coty fell 5.5 per cent to $4.92 just before midday in New York.
Peter Harf, JAB managing partner and chairman of Coty, welcomed the arrival of KKR: “Their investment and partnership will be instrumental to strengthening Coty’s balance sheet and helping the company to achieve long-term growth in shareholder value.”
Credit Suisse and Antonio Weiss, the former Lazard banker and US Treasury official, advised Coty on the deal.