Why the Coty IPO Didn't Perform

As happens all too often in the markets, an IPO has come out with lots of hype and, ultimately, little in the way of delivered expectations. Women's fragrance giant Coty (NYSE: COTY  ) raised one of the largest IPOs in consumer product history last week, earning more than $1 billion. In the days prior, Wall Street played up the IPO in classic fashion -- citing large brand product awareness and celebrity endorsements as cause for investment. While Fools already know this is not a real reason to buy, apparently the market was either inundated with quick-flipping traders, or just unimpressed by the scent of Coty.

The situation
Coty is a very old, very large maker of women's fragrances -- from Calvin Klein to Adidas. Prior to its IPO, the company was most recently in the news for its proposed near-$11 billion buyout of beauty-product multilevel marketer Avon. The acquisition failed, though in my opinion this was an OK turnout for Coty.

The thing is, this IPO was never really for shareholders, but for the company's owners. Out of the $1 billion raised yesterday, the third-largest IPO of 2013, approximately zero of it went to operating business.

Moreover, the IPO implies an enterprise value for Coty of roughly $8.6 billion. Last year, the company hit $761 million in adjusted EBITDA, implying an EV/EBITDA of 11.3 times. For a price-conscious investor, this is a little much to pay for the mature-state company that will likely only meaningfully grow via acquisition in the future. On a price-to-free cash flow basis, the company trades at 19 times  trailing one-year FCF.

For comparison, take LVMH. It's a larger and more diversified luxury brand holding company, and therefore not a pound-for-pound competitor, but it trades at an EV/EBITDA of 9.7 times. On the other hand, L'Oreal trades at more than 16 times.

Coty surely isn't the most overvalued IPO of the year (there are plenty of tech companies to take that cake), but it certainly is not one that value-oriented investors would take a look at.

Looking forward 
Coty does have an impressive roster of brands (Davidoff, Playboy, etc.), even if the company's name itself is not a household term. Investors may have been more jazzed about the IPO if the proceeds could have gone to the company itself -- perhaps toward a high-value-added acquisition.

Coty has the potential to be an anchor-style long-term pick, but investors need to take a deep look at the company and its management practices over the years. As a company with a century under its belt, it's highly unlikely Coty will go to zero, but it's important to be in a well-managed company and at a price that compels the wallet.

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