• by Karlene Lukovitz  @KLmarketdaily, July 9, 2015

Procter & Gamble has agreed to merge 43 of its beauty brands with Coty Inc. in a deal worth approximately $12.5 billion.

The deal will create one of the world's largest beauty companies, with pro forma combined annual revenue of more than $10 billion, basically doubling Coty's size. Coty will become the global leader in fragrances, and significantly increase its share of the color cosmetics market. P&G's beauty business had revenues of $5.9 billion in the fiscal year ended June 2014.

Following the transaction, P&G shareholders will own 52% of the outstanding shares in the combined company and Coty’s existing shareholders will own 48%.

The transaction includes P&G’s global salon and retail hair care, cosmetics and fine fragrance businesses, along with some hair styling brands. Brands reportedly among those in the deal include CoverGirl and Max Factor cosmetics, Clairol hair color, Wella shampoo, and fragrance brands Dolce & Gabbana, Gucci and Hugo Boss.

P&G will continue to wholly own some beauty and personal care brands, including Olay, Pantene and SK-II cosmetics, and will focus on growing these, CFO Jon Moeller told analysts.

Coty's large, existing portfolio of beauty and fragrance brands includes Calvin Klein, Sally Hansen, Chloé, Davidoff, Marc Jacobs, OPI, Philosophy, Playboy and Rimmel. (Its non-beauty brands include Adidas and Guess.)

The deal represents P&G's largest-ever divestiture, and according to Moeller, more or less completes the implementation of its strategic plan to pare its traditionally highly diverse portfolio down by 100 brands (about 15% of its total business), leaving select, growing global brands in categories such as toilet paper, disposable diapers and dish soap.  

"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," stated P&G chairman, president and CEO AG Lafley. "We have leading global brand positions in these categories, consumer preferred products and leading brands in the largest markets. These businesses and brands have historically grown faster and have been more profitable than the balance. We expect these 10 categories to grow and create value as we focus the energy and resources of the company exclusively on them.” The merger with Coty "will provide an excellent new home" for the beauty brands, he added.

This deal, along with other recent ones — including sales of Iams, Duracell and other brands during the past year — brings the total number of brands divested by P&G or in the process to more than 90.

The beauty business has lagged the performance of P&G's other four core businesses in recent times. Sales of hair, cosmetics and personal care products were down 11% in the first quarter of this year, making beauty the only division to show a sales decline, excluding currency effects, according to The Wall Street Journal.

The deal is expected to be completed in the second half of 2016. Its structure has not been finalized, but P&G said its preference is a Reverse Morris Trust split-off transaction in which P&G shareholders could elect to exchange P&G shares for shares of Coty — a structure that would reportedly help P&G minimize the deal's tax bite.

Coty said that it expects to realize about $550 million in total cost savings on an annualized basis over the next three years, including $400 million in non-transferred costs and an incremental $150 million in additional cost synergies, equating to 10% of the acquired revenues. 

"There is no question that with the broader offering of leading brands, strong brand support, the development of a better pipeline of innovative products and the much broader geographical reach and scale, Coty will strengthen its competitive position and ability to capitalize on revenue and profit growth opportunities over time," said Coty's chairman and interim CEO, Bart Becht.