BREAKINGVIEWS:Coty's IPO should give it a leg up on Avon

Thu Jul 5, 2012 3:12pm BST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Agnes T. Crane

NEW YORK, July 5 (Reuters Breakingviews) - Coty has moved on, at least for the time being. The fragrance company that made an ambitious, if unsuccessful, bid for rival cosmetics group Avon (AVP.N) earlier this year is seeking a consolation prize in the public markets. The company controlled by Germany’s Reimann family hopes to sell $700 million in an IPO. The deal could bolster its case for another shot at Avon.

Coty’s sales are on the rise, thanks in part to an acquisition spree in its 2011 fiscal year that brought in nail-care company OPI and beauty firm Philosophy. Revenue this year should be 14 percent higher than two years ago and operating profit is in line to grow 30 percent from a year ago, when annualizing the first nine months of fiscal year 2012.

That could make for a pretty valuation. Indeed, it’s not a stretch to put Coty in league with Estee Lauder (EL.N) and L’Oreal (OREP.PA), whose enterprise values stand at between 15 and 19 times their estimated 2012 earnings before interest and tax. Avon, by contrast, fetches a multiple of about 13 times EBIT thanks to management missteps and an ongoing SEC probe.

Coty’s growth, coupled with a proven management team including Chairman Bart Becht, who turned around Reckitt Benckiser (RB.L), could make up for the group’s lack of a major global brand. Applying Estee Lauder’s multiple to Coty’s 2012 annualized operating income earns the fragrance firm an enterprise value of $5.5 billion. After subtracting debt, that gives a potential market cap of $3.6 billion, or around $9 a share. Kick it up to L’Oreal’s 19 multiple, and Coty’s equity could be worth $5 billion, or around $13 a share.

That’s not just a potential windfall for the wealthy Reimann family or other existing stakeholders who are selling all of the shares in the IPO. Coty’s lofty valuation could also be wielded as an acquisition weapon if Coty revisits its Avon crush. The door-to-door beauty company’s long-suffering shareholders might be happy to take Coty’s fancier paper.

Coty has time to weigh its options. Volatile markets could put the kibosh on IPOs in general. And Coty’s sale could be particularly tough given that proceeds will go to existing stakeholders, rather than toward reducing debt. Moreover, a dual-share structure means new shareholders won’t have much say over the company’s direction.

But if the IPO does get off the ground, there's likely to be more mating rituals in beauty care.

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CONTEXT NEWS

- Coty said it plans to raise $700 million through an initial public offering, according to a June 28 filing with the Securities and Exchange Commission. The fragrance maker offered to acquire Avon for $10.7 billion earlier this year, but dropped the bid after the beauty firm showed little interest in a tie-up.

- The IPO proceeds will go to existing stakeholders rather than the company, Coty said.

- SEC filing: link.reuters.com/dax29s

- Reuters: Coty files to go public after Avon snub [ID:nL3E8HT3GP]

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- For previous columns by the author, Reuters customers can click on [CRANE/]

(Editing by Rob Cox and Martin Langfield)

((agnes.crane@thomsonreuters.com)) Keywords: BREAKINGVIEWS COTY/IPO

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