Coty (NYSE:COTY) stock recently rallied after German conglomerate JAB Holding made a tender offer for up to 150 million shares at $11.65 apiece. The offer, which values Coty at a 38% premium to its 90-day volume-weighted average share price prior to the announcement, could increase JAB's stake in Coty from 40% to as much as 60%.
The offer came shortly after Coty's second-quarter earnings topped Wall Street's expectations and the cosmetics maker signed a new licensing deal with Burberry. Coty stock has now surged about 50% in the span of a week, but it remains down 45% over the past 12 months.
That sell-off was caused by supply chain issues, department store closures, and tougher competition from stand-alone brands like Ulta Beauty and LVMH's Sephora. All of these factors have weighed on Coty's revenue and earnings growth recently.
JAB's offer seems to indicate that the stock, which trades at about 15 times forward earnings after its recent rally, is undervalued. However, investors shouldn't get too excited about this tender offer and assume that it will lead to a full takeover.
A tender offer isn't a takeover
A tender offer is a public bid for investors' existing shares. This means that JAB is looking to buy 150 million shares from existing shareholders at $11.65 per share. If JAB doesn't convince investors to tender at least 50 million shares by a not-yet-specified date, the deal will fail.
Many investors might consider JAB's bid to be too low, since the stock was trading in the low $20s just a year ago. By tendering their shares, investors who have owned the stock for a few years would lock in significant losses. On the other hand, the tender offer is an opportunity for investors who bought shares within the past three months to score a quick windfall.
JAB's bid values Coty at only 18 times this year's earnings and 16 times next year's earnings -- so long-term investors might prefer to wait for a higher offer. In the meantime, they can continue to collect Coty's generous dividend, which currently has a 4.5% yield.
Why does JAB want to control Coty?
JAB has been invested in Coty for nearly three decades. In its press release, JAB stated that Coty "has the potential to address its challenges and prosper over the long-term, and that ... recent management changes are an important first step" towards improving its performance.
Those changes include a CEO change last year (Coty's fourth over the past five years) and the appointments of a new CFO, a new chief global supply chain officer, and a new COO of the consumer beauty business since the beginning of 2019. The consumer beauty division, which was significantly expanded in late 2016 by Coty's takeover of Procter & Gamble's (NYSE:PG) specialty beauty business, has been in a slump ever since.
Coty is relying on the growth of its luxury brands to offset that mass-market slowdown. Nevertheless, analysts expect its revenue and earnings per share to both decline 6% this year. Meanwhile, Procter & Gamble benefited from the divestment of its weaker beauty brands. Analysts expect it to grow its revenue and EPS by 1% and 5%, respectively, this year.
JAB was already Coty's largest investor, and it has previously pushed the company to change its leadership and business strategies. JAB likely believes that gaining majority control would allow it to implement those changes more quickly.
Could this lead to a full takeover?
Over the past few years, JAB has built a diverse portfolio, buying up majority stakes in Peet's Coffee & Tea, Caribou Coffee Company, Jacobs Douwe Egberts, Einstein Noah Restaurant Group, and Keurig Dr Pepper. It also owns Krispy Kreme and Panera Bread, which were both facing major challenges before JAB swooped in.
Given that track record, investors might be wondering why JAB doesn't simply buy Coty. After all, Coty's market cap of $8.4 billion seems comparable to the $7.5 billion JAB paid for Panera Bread.
However, Coty's enterprise value is close to $16 billion because it's shouldering more than $7 billion of net debt -- much of which came from its $12.5 billion takeover of P&G's brands. JAB likely doesn't want to inherit that debt, and it would be much cheaper to gain control of the company with its $1.75 billion tender offer.
Therefore investors shouldn't confuse JAB's tender offer with a takeover attempt. There's a good chance that investors will spurn the offer, causing the stock to quickly give up its temporary gains.