KKR to make significant investment in Coty Inc

KKR agreed to make a majority investment in Coty's professional beauty and retail hair businesses including the Wella, Clairol, OPI and ghd brands at an enterprise value of $4.3 billion.

KKR will make a significant investment in Coty Inc, helping the company deleverage its balance sheet. KKR agreed to make a majority investment in Coty’s professional beauty and retail hair businesses including the Wella, Clairol, OPI and ghd brands at an enterprise value of $4.3 billion. KKR also agreed to provide Coty inc with an initial $750 million through the sale of convertible preferred shares, as well as an incremental convertible preferred investment of $250 million. “In the shadow of a global lockdown, we have also announced a comprehensive plan to reduce fixed costs by $700 million, which allows us to confirm our target to reach mid teens operating margins by FY23,” said Coty CFO and COO Pierre-André Terisse.

Press Release

Coty Inc. (NYSE: COTY) (“Coty” or the “Company”) today announced a strategic partnership with global investment firm KKR which will provide the Company with an initial investment of $750 million through the sale of convertible preferred shares to KKR. Additionally, Coty and KKR signed a Memorandum of Understanding (“MOU”) for the sale of a majority in Coty’s Professional Beauty and Retail Hair Businesses including the Wella, Clairol, OPI and ghd brands (together, “Wella”) at a contemplated enterprise value of $4.3 billion, or 12.3x 2019 EBITDA. Coty also announced its financial results for the third quarter of fiscal year 2020, ended March 31, 2020, including comprehensive plans to reduce fixed costs by $700 million.

Under the terms of the MOU, Coty will carve out Wella into a standalone company in which KKR will acquire a 60 percent stake and Coty will retain the remaining 40 percent interest. The contemplated majority divestment of Wella would result in Coty receiving additional cash proceeds of approximately $3 billion. On signing of the Wella transaction,, KKR will also make an incremental convertible preferred investment of $250 million in Coty. Together with the initial $750 million investment, these transactions will result in significant deleveraging of Coty’s balance sheet and position the company for long-term growth and investment in its core portfolio. Coty’s mass beauty business in Brazil will remain a fully owned business of Coty.

Peter Harf, Founding Partner of JAB and Chairman of Coty, commented: “We are thrilled to enter into this strategic partnership with KKR, one of the world’s preeminent investment firms with an exemplary track record of value creation. Their investment and partnership will be instrumental to strengthening Coty’s balance sheet and helping the company to achieve long-term growth in shareholder value.”

Johannes Huth, Partner and Head of KKR EMEA, said: “Coty is a leader in the attractive global beauty market with iconic brands, global presence and scale, and a strong track record of innovation and growth. We are excited to form this partnership to invest in Coty to support it through this period of unprecedented global uncertainty and allow it to emerge as a stronger, more agile business, and to acquire a majority stake in Wella, a market leader with a strong portfolio of brands in the attractive professional hair market where we see significant opportunities to accelerate growth in partnership with its experienced leadership team. We look forward to working towards the establishment of a lasting and value-creating strategic partnership.”

Pierre-André Terisse, Coty COO and CFO added: “Today’s announcement with KKR provides an increased sense of energy and excitement for all of us at Coty. As part of a number of steps to continue Coty’s transformation, the strategic partnership with KKR is clearly the most game-changing. We will see immediate improvement to our balance sheet and are in the final stages of finalizing a 60/40 partnership for our Professional Beauty and Retail Hair businesses. In the shadow of a global lockdown, we have also announced a comprehensive plan to reduce fixed costs by $700 million, which allows us to confirm our target to reach mid teens operating margins by FY23. Overall, this alliance and the steps we are taking to strengthen our businesses will be key elements of our transformation.”

Strategic Transaction with KKR

Effective immediately, Coty has agreed to issue $750 million of convertible preference shares and KKR is fully subscribing to the issue. These shares will carry a coupon of 9% and will be convertible into Coty shares at $6.24, equating to a 20% premium to Coty’s closing stock price on May 8, 2020 of $5.20. KKR will be entitled to two seats on Coty’s Board of Directors following the completion of the transaction.

Simultaneously, Coty and KKR have signed an MOU and are engaged in exclusive talks to form a partnership for Wella at an enterprise value of $4.3 billion, in which KKR is expected to own 60 percent and Coty 40 percent, subject only to completion of limited confirmatory due diligence and execution of definitive documentation. Upon signing of the Wella transaction, Coty will issue $250 million of additional convertible preference shares to KKR with the same coupon and strike price provisions as the first $750 million tranche, resulting in incremental total proceeds of $3.3 billion. KKR is making its investment primarily from its flagship North American and European private equity funds, Americas Fund XII and European Fund V.

AFW LP and Credit Suisse are serving as financial advisors to Coty, and Skadden, Arps, Slate, Meagher & Flom LLP are serving as legal counsel to Coty.

Medium Term Outlook

Assuming the successful completion of the KKR partnership, Coty’s expanded $700 million fixed cost reduction program will make the Company more competitive. Coty continues to target operating margins in the mid-teens by FY23.