Coty Inc. (COTY), maker of perfumes endorsed by Beyonce and Heidi Klum, is for sale at a 25 percent discount to rivals in its initial public offering, a valuation that may lure investors unfazed by the billionaire Reimann family’s controlling stake.
Coty’s owners are seeking as much as $1.06 billion in the IPO today, according to filings and data compiled by Bloomberg. Joh. A. Benckiser, the investment arm of the billionaire Reimann family that controls Coty, is creating a new share class that will give it 10 votes a share, compared with one vote for IPO investors. That would allow the Luxembourg-based firm to retain its 85 percent voting power even after paring its stake.
While that leaves IPO buyers with less influence, they’re poised to benefit if Coty makes good on efforts to expand in developing countries and win customers from more costly rivals Avon Products Inc. (AVP) and Estee Lauder Cos. The maker of fragrances by Calvin Klein and Marc Jacobs has used acquisitions to broaden its reach in Asia and add skin-care products in recent years.
“If you’re after capital gains and want a quiet investor’s life, that’s a good opportunity, because it’s undervalued,” said Ronald Klingebiel, assistant professor of strategy at Warwick Business School in Coventry, England. “It’s not interesting if you’re an activist investor.”
The midpoint of the IPO price range would give Coty an enterprise value of about $8.6 billion including net debt, or about 11 times earnings before interest, taxes, depreciation and amortization in the 12 months through March 31, data compiled by Bloomberg show.
Avon and Estee Lauder, which Coty names as competitors, currently trade at enterprise values of about 14 times Ebitda for the trailing 12 months, the data show. Coty’s $6.7 billion market value at the midpoint would be smaller than Avon’s $10.1 billion as of yesterday’s close and Estee Lauder’s $26.3 billion.
In fiscal 2012, more than half of Coty’s $4.61 billion in sales came from fragrances, 31 percent from color cosmetics, and 16 percent from skin and body care, filings show. Coty agreed to pay $400 million for Chinese skin-care company TJoy Holdings Ltd. in December 2010 to gain access to its distribution channels. Avon, the door-to-door cosmetics retailer, last year rebuffed a $10 billion takeover offer by Coty that would have provided a global sales network.
Coty’s larger rivals rely less heavily on fragrances, which tend to be more vulnerable to declines in consumer spending, said Pierre Tegner, an analyst at Natixis in Paris. Of Estee Lauder’s $10 billion of sales in the 12 months through March 31, 13 percent came from fragrances, data compiled by Bloomberg show. Avon doesn’t disclose how much of its $10.6 billion in sales during the same period were from fragrances.
Coty’s owners recognize “there is a need to quickly diversify the business,” Tegner said in a telephone interview. “Fragrances is a very attractive business, but you have volatility.”
JAB joins Coty owners Berkshire Partners LLC, which has no relation to Warren Buffett’s Berkshire Hathaway Inc., and Rhone Capital LLC in offering 57.1 million shares for $16.50 to $18.50 each. JAB alone plans to sell as much as $806 million of shares, paring its holding to 70 percent. While JAB’s plans for the cash haven’t been disclosed, the firm has recently pursued a number of purchases.
The holding company has agreed to spend $11 billion buying up coffee companies, diversifying away from cosmetics and luxury brands. JAB agreed to buy U.S.-based chains Peet’s Coffee & Tea Inc. and Caribou Coffee Co. for more than $1 billion in total last year, and in April agreed to buy Amsterdam-based D.E Master Blenders 1753 NV for about 7.5 billion euros ($10 billion).
JAB and its subsidiaries also control Labelux Group GmbH, which manages luxury brands Bally, Belstaff and Jimmy Choo, and more than 10 percent of Slough, England-based Reckitt Benckiser Group Plc, maker of Durex condoms and Nurofen painkillers.
“Money gives you flexibility,” said Graham Hales, London chief executive officer at brand strategy consultancy Interbrand. “You don’t raise several hundred million dollars in cash just for the sake of it. Coffee has clearly been a growth market in the last few years, and they’ve gone into that quite significantly.”
Representatives for JAB and Coty declined to comment.
Coty was founded in 1904 in Paris by Corsican-born Francois Coty. The company owns the color cosmetics brand OPI and has a licensing agreement to sell the Adidas line of skin-care products.
The company, now New York-based, is pursuing the IPO following a recovery in the shares of cosmetics companies this year. Estee Lauder, the maker of Mac cosmetics and Clinique skin-care products, has climbed 13 percent since the beginning of this year, while Avon has jumped 63 percent.
Bank of America Corp., JPMorgan Chase & Co. and Morgan Stanley are managing the sale. The shares will be listed on the New York Stock Exchange under the symbol COTY.
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