Originally Posted by Xelorpepsi
I enjoy my anonymity here, so let's just say that I know both the PE space, KKR in particular, and skincare extremely well. We are here to exchange ideas, learn and hopefully make some money too, so please don't take my comment personally.
- KKR acquired a 60% stake in Coty Professional Beauty, now Wella, for an EV of $4.3bn. On their end, it's pure financial engineering and a cost cutting exercise to bring margins up - won't comment on that. It helped delever a bit Coty's balance sheet, but they had to sell one of their rare cash cows and on a pro forma basis their net debt to EBITDA still looks really nasty. Most likely, KKR will exercise the drag along provision and force Coty to sell. Great on paper, will reduce the debt burden, but Coty will be left with few strong brands and significantly smaller - although with a cleaner cap structure.
- All the people who've been at the helm of COTY had amazing track-records. It's one thing to hire a top gun, but if the rest of the organisation is broken and relies on outdates processes and infrastructure, it will take ages to turnaround the business. One person can't do the job for the 19k or so existing employees.
- The acquisition of Kylie Skin still needs to be EPS accretive in the long run. They paid 9.6x FY18 Revenue (i.e. $125m top-line, can't remember the EBITDA back then) for a sub par and pricey product range that won't be relevant in the next 3 /4 years (formulas full of nasties, low / no recyclability, with a huge key person risk, etc). Kylie sells today, but nothing tells you she will tomorrow... just like most influencers. It was a fantastic opportunity for her to crystallise some of her gains, but it will most likely be a poor bet for Coty apart from the fantastic PR stunt. Keep in mind that even if things go well, it's still very small and with a 60% ownership the contribution to their bottom line is negligible.
- Only point where I agree with you is that makeup consumption is down and will bounce back. It's just a timing issue. The drop has already been partly offset by an increase in skincare purchases as people develop new skin problems (e.g. Maskne) due to face masks, the lack of exposure to the sun and an overexposure to blue light.
Is there a chance for the stock to bounce back from $7 to $10 or even $15, absolutely - but as we stand, Coty still needs to do a huge amount of work to turnaround their operations and be in a much better place in two or three years. It can be short-term bet, but if you take a long-term view, there are many safer stocks in the FMCG space.
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