KKR has agreed to inject $ 750 million into debt-bearing cosmetics maker Coty in the first step toward a larger deal that would see the US private equity group buy a controlling stake in the beauty and hair care division professionals of the company.
The companies announced on Monday a “strategic partnership” which paves the way for an agreement to be finalized during talks between the two companies and the majority owner of Coty, the JAB investment vehicle.
The plan is the latest in a series of measures taken by Coty and its donors at JAB to overthrow the company, whose biggest brands such as CoverGirl have lost favor with consumers who flock to new rivals, often led by celebrities.
Coty is much smaller than the leaders in cosmetics L’Oréal and Estée Lauder and, given its heavy debts, its operational problems and the constant turnover of its executives, it has not been able to follow the ‘rapid market development.
Monday’s announcement outlined a plan in which Coty’s professional beauty division, which includes the brands Wella, Clairol, OPI and ghd, would be merged into a separate company. KKR would own 60% and Coty 40% of the new venture, which would have an enterprise value of $ 4.3 billion, the companies said. Coty said the transaction would result in a $ 3 billion cash return.
If the deals are completed, a total of $ 4 billion in cash payments will be paid to Coty, which will be used to halve its debt of $ 8.1 billion. KKR would also appear as Coty’s second largest shareholder with up to 17% stake and two seats on the board of directors.
Coty launched the beauty and hair care auction last October in hopes of raising about $ 8 billion, people close to the process said at the time. Unilever and Henkel, along with private equity firms, were evaluating the bids at the time of the Covid-19 pandemic, shutting down hair and beauty salons and disrupting the equity and debt markets.
But Coty and his JAB funders continued the auction, and with the KKR plan, they bet they found a way to reach a deal. KKR will first inject $ 750 million in preferred shares into Coty and an additional $ 250 million if the two parties finalize the sales agreement for the professional beauty unit.
Coty will pay a 9% coupon to KKR under the terms of the preferred shares, which can be converted into common shares when the Coty share price reaches $ 6.24. If exercised, KKR will own up to 17% of the Coty shares and all other shareholders will be diluted.
Upon conversion, JAB’s ownership interest of approximately 60% would be reduced, but would continue to hold a controlling interest in Coty. Coty’s shares fell 5.5% to $ 4.92 just before noon in New York.
Peter Harf, Managing Partner of JAB and President of Coty, welcomed the arrival of KKR: “Their investment and partnership will be key to strengthening Coty’s balance sheet and helping the company achieve long-term value growth for shareholders.”
Credit Suisse and Antonio Weiss, former Lazard banker and head of the US Treasury, advised Coty on this matter.