Shares of Coty (NYSE:COTY), a leading global beauty company, soared 20% Monday morning after the company announced a strategic transformation and definitive agreement with KKR.
The deal calls for Coty to sell a majority interest in its retail hair business to KKR. The deal values the businesses at $4.3 billion, and KKR will now own 60% of the brands that include the Wella, Clairol, OPI, and ghd brands, collectively known as Wella. With the deal for its Wella business, Coty is targeting a roughly $600 million net reduction in fixed costs over the next three years. In a press release Peter Harf, who will assume the role of chief executive officer, had this to say:
I've known Coty for a long time and there is a lot of potential within this company. I'm delighted to return to an active leadership role. We are all energized by the task ahead -- to lead Coty to the best it can be. Further, in KKR, we have a world-renowned investor that will work alongside us in transforming Coty.
For investors this deal does one important thing: It immediately deleverages the company thanks to a $1 billion direct investment from KKR and also $2.5 billion net cash proceeds from the transaction. That will lower Coty's net debt/adjusted EBITDA from roughly 5.6 times to roughly 4.5 times. Also worth noting is the shakeup in the executive committee, which Coty hopes will be able to execute faster and with less bureaucracy. Management believes that selling the position of Wella will enable the company to focus on its core Prestige and Mass Beauty businesses, which should drive strong financial improvement through fiscal 2023. Time will tell how successful this transaction is, but in a time of uncertainty for many consumer discretionary stocks, deleveraging, refocusing on core businesses, and bringing in a valuable partner are positive steps.