Procter & Gamble to sell its beauty brands to Coty for $12.5 bn
09 July 2015
A Reverse Morris Trust transaction is a tax-avoidance strategy, in which a corporation wanting to dispose of unwanted assets can do so while avoiding taxes on any gains from those assets. The Reverse Morris Trust starts with a parent company looking to sell assets to a smaller external company. It creates a subsidiary, which merges wit the smaller company to create an unrelated company. The unrelated company issues shares to the shareholders of the original parent company. If those shareholders control over 50% of the voting right in the unrelated company, the Reverse Morris Trust is complete. The parent company has effectively transferred the assets, tax-free, to the smaller external company.
The transaction for 43 brands includes P&G's global salon professional hair care and color, retail hair colour, cosmetics and fine fragrance businesses, along with select hair styling brands.
The brands that are being sold to Coty include Wella Professional, Sebastian Professional, Clairol Professional, Sassoon Professional, Nioxin, SP, Koleston, Soft Color, Color Charm, Wellaton, Natural Instincts, Nice & Easy, VS Salonist, VS ProSeries Color, Londa/Kadus, Miss Clairol, L'image, Bellady, Blondor, Welloxon, Shockwaves, New Wave, Design, Silvikrin, Wellaflex, Forte, Wella Styling, Wella Trend, Balsam Color, Hugo Boss, Dolce & Gabbana, Gucci, Lacoste, bruno banani, Christina Aguilera, Escada, Gabriela Sabatini, James Bond 007, Mexx, Stella McCartney, Alexander McQueen, Max Factor and Covergirl.
P&G has not yet structured the deal, but expects to go in for a Reverse Morris Trust split-off transaction in which P&G shareholders could opt to exchange P&G shares for shares of Coty.
P&G shareholders would have the option of exchanging all, some or none of their P&G shares. If executed as a split-merge, P&G would establish a separate entity to hold the RMT 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.
Under this structure, P&G shareholders would own 52 per cent of all shares outstanding, while Coty's existing shareholders would own 48 per cent of the combined company.
P&G said that it expects to finalise the details of the transaction in the coming months and to close the transaction in the second half of calendar year 2016, pending regulatory approvals.
Based on Coty's current stock price and outstanding shares, the value of the transaction is approximately $15 billion. The value is comprised of approximately 413 million shares, or 52 per cent of the diluted equity of the newly combined company, valued at approximately $13.1 billion and the assumption of $1.9 billion of debt.
The transaction will lead to one-time gain of between $5 billion and $7 billion, P&G said.
P&G chairman, president and CEO, AG Lafley, said, ''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 ………….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.
The latest sale comes less than a year after P&G sold its Duracell battery business to Warren Buffett's investment arm Berkshire Hathaway in a stock swap deal worth $3 billion and most of its pet food business to Mars Inc for $2.9 billion. (See: Warren Buffett to buy Duracell from P&G in a stock swap deal worth $3 bn)
Last December, it also sold its Camay and the Zest brands outside of North America and the Caribbean and the Talisman manufacturing facility in Mexico to Unilever for an undisclosed amount.
After years of expansion into lines like pet food and beauty products, P&G, which also makes Gillette razors, had said in August last year that it would cut as many as 100 brands from its portfolio to focus on others, like Tide detergent, which has made the company a powerhouse over the decades. (P&G to cut 100 underperforming brands, focus on key products)
The sale is also part of the company's strategy to improve its financial performance by focusing on core brands that generate 95 per cent of the profits and 90 per cent of sales.
P&G, the world's largest consumer products company, had acquired Wella in 2003 from the heirs of founding Ströher family for €6.5 billion ($7.1 billion), including debt of €1.1 billion. The deal was then the biggest acquisition in P&G's history.
Its Professional unit that sells hair care products to professional hairdressers, generates over 30 per cent of total Wella sales and Cosmetics and Fragrances unit accounts for 20 per cent.
Its main competitors are Alberto-Culver Co, Beiersdorf AG, L'Oréal SA, and Johnson & Johnson.
P&G is also said to be exploring the sale of Braun, its electric razors and toothbrushes unit, which it acquired as part of its $57-billion purchase of Gillette in 2005.
New York-based Coty is owned by Vienna-based Joh A Benckiser, the German holding company that manages the interests of the billionaire Reimann family of Germany, who also owns a substantial stake in Reckitt Benckiser, the world's largest maker of household cleaners.
With annual turnover of around $4.6 billion, Coty was founded in Paris in 1904 by François Coty, who is credited with founding the modern fragrance industry.
The company holds a 48-per cent share of the US fragrance market.
The 108-year old company develops and manufactures beauty care products that include fragrances, toiletries, colour cosmetics, skin care, sun care, and personal care products. Its Jennifer Lopez perfume has raked in $1 billion in sales since being introduced in 2002.
The Coty brand portfolio is distributed in prestige and ultra-prestige stores and includes Calvin Klein, Davidoff, Jennifer Lopez, Sarah Jessica Parker, Adidas, Beyoncé Knowles, Celine Dion, David and Victoria Beckham, Esprit, Pierre Cardin, Playboy, Shania Twain, Stetson, and Tonino Lamborghini among others.