Coty confronts true cost of P&G beauty business takeover

The cosmetics company says the acquisition will cost roughly $1.2bn over next four years

Coty’s Chairman and Interim CEO Bart Becht has provided an update on the cost of the acquisition of the P&G brands it is due to take over this October.

While Becht stressed that estimates for cost savings have risen to roughly $780m annually, a “substantial increase” compared with when the company made the initial merger announcement, it was noted that to realise the cost synergies and close the transaction, Coty is in line for a one-off cost of approximately $1.2bn over the next four years. Originally, Coty anticipated costs of $500m over three years.

The revelation came as Coty released its Q3 2016 results, which were a blow for the company. Coty suffered a loss with profits in the negative by $26.8m, down from profit of $75.5m in the prior year period. The loss was said to reflect “lower operating income and higher interest and other expenses”.

Looking at individual categories, skin and body care net revenues were seen to take a hit, down 5% like-for-like. Coty said the drop was down to its philosophy and Playboy brands, although adidas continued to put in a strong performance in this sector.

Fragrances were also impacted negatively, with net revenues down 1% like-for-like. The company said continued portfolio improvement efforts particularly in celebrity and lifestyle fragrances in the mass channel, were not offset by growth in Marc Jacobs and contribution from Miu Miu.

There was some good news however in the colour cosmetics category. Here, net revenues increased 1% like-for-like, with Rimmel emerging as a driving force. Sally Hansen took a knock however, with lower revenues reflecting the decline in the US retail nail market, Coty noted.

Coty also gave an update on its acquisition of Brazil’s retail chain Hypermarcas, announced in November last year. While the deal closed on 1 February 2016 with Hypermarcas contributing $14.3m in revenues, these were negatively impacted by a “change in commercial terms to conform with Coty’s standards”, the company noted.

As a result of the loss made in the third quarter, shares reacted accordingly falling by as much as 7% in the hours that followed their release.

But Becht remained positive and said: “Q3 revenues were consistent with our expectations for muted like-for-like trends through the end of the fiscal year, as we gradually rationalise non-strategic product lines and businesses. Power brands on the other hand continued to outperform the overall business both for the quarter and fiscal year-to-date. While Q3 adjusted operating income was down due to one-off items and fiscal year-to-date adjusted operating income is largely flat, we continue to target high single-digit growth for the full year adjusted operating income at constant rates largely offset by negative FX impact.”

He added: “In summary, we believe we are well on track to build a healthy platform for Coty to become a global leader and challenger in the beauty industry and provide the right basis to drive profitable growth and deliver shareholder value over time."

Coty is due to takeover approximately 41 leading beauty brands from P&G including colour cosmetics, hair care and fragrance brands including Hugo Boss, Gucci, Covergirl, Max Factor, Wella and Clairol.

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