Coty signed a definitive agreement with KKR as part of a strategic transformation that will deleverage Coty’s balance sheet, streamline its operations and strengthen its leadership team.

Under the definitive agreement, Coty and KKR entered into a strategic transaction for Coty’s professional and retail hair business, including the Wella, Clairol, OPI and ghd brands (together, Wella), valuing the businesses at $4.3 billion on a cash- and debt-free basis. KKR will own 60% of this separately managed entity and Coty will own the remaining 40%.

KKR is investing $1 billion directly into Coty through the issuance of convertible preferred shares. These shares 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, the last trading day before entry into the investment agreement. The initial $750 million of this investment was completed on May 26, 2020, with the remaining $250 million expected to be completed in the next two months. Assuming full conversion, JAB Investors will remain Coty’s largest shareholder, with 50% ownership in the company. KKR will be the second largest shareholder, with a 17% stake.

KKR’s majority investment in Wella values the business at $4.3 billion on a cash- and debt- free basis. This equates to 12.3x fiscal 2019 adjusted EBITDA of approximately $350 million on a fully-allocated basis, which includes approximately $160 million of central costs, which will not transfer as part of the transaction.

At the closing of the deal, which is expected in the next six to nine months, the Wella business is anticipated to issue approximately $1 billion of debt and distribute the proceeds to its respective shareholders. This will result in total net cash proceeds to Coty of approximately $2.5 billion, including $2.6 billion relating to 60% of Wella’s enterprise value and $400 million from the dividend distribution, net of $200 million relating to debt items and $300 million of tax and transaction fees.

Based on Coty’s fiscal 2019 results ended June 30, 2019, this two-pronged transaction lowers Coty’s net debt/adjusted EBITDA leverage from approximately 5.6x to approximately 4.5x on a pro forma basis.

The investment from KKR will provide Coty with the additional liquidity, via the $1 billion convertible issuance coupled with the anticipated $2.5 billion in net cash proceeds at the closing of the Wella deal, to improve Coty’s leverage profile, providing the company with the flexibility to navigate through the current challenges and continue investing in its brands. KKR is committed to bringing resources to Coty from day one, including adding one of the firm’s investors to Coty’s board, Johannes Huth, partner and head of KKR EMEA. KKR will also nominate a second board member in the near term.

The sale of a majority interest in the professional and retail hair business simplifies Coty’s portfolio and will allow Coty to focus on its core prestige and mass beauty businesses.

• Prestige: Coty will reinforce its leadership positions through innovation in fragrances and adjacent categories, a focus on the premium end of its portfolio, and the e-commerce development of the prestige beauty franchise, which encompasses brands such as Calvin Klein, Hugo Boss, Burberry and Gucci, as well as the recent addition of Kylie Beauty, with its direct to consumer business model and 178 million followers on Instagram.
• Mass Beauty: Coty will reinvest in its power brands in priority markets to improve business fundamentals and expand its omni-channel presence. Key brands include Sally Hansen, Rimmel, CoverGirl and Max Factor.
• Cost leadership: Excluding the Wella business, Coty is targeting a net reduction in fixed costs of approximately $600 million in cash over the next three years, equating to 25% of its pro forma fixed cost base. The one-off costs associated with this program are estimated at $500 million.

Taken together, these measures will drive financial improvement at Coty through fiscal 2023, with the company continuing to expect adjusted operating margins in the mid-teens and leverage of below 4x.

In fiscal 2019, Coty’s pro forma net revenues would have been $5.9 billion, composed of 55% prestige beauty and 45% mass beauty. Geographically, the pro forma portfolio would have been 49% driven by EMEA, 38% Americas and 13% Asia Pacific. Coty’s pro forma fiscal 2019 EBITDA would have been $1 billion. Taking into account approximately $160 million of stranded costs from the professional and retail hair carve-out, this would become $840 million.

The founder and chairman of Coty, Peter Harf, will assume the additional role of CEO. Harf is founder and managing partner of JAB Investors, an investment firm with more than $100 billion of assets under management. He has previous roles as chairman and CEO of Benckiser N.V. and deputy chairman of Reckitt Benckiser, which he formed through the merger of Benckiser N.V. with Reckitt Coleman in 1999. While leading Benckiser, Harf built modern day Coty and spent more than 20 years with direct executive responsibility for the business, as chief executive from 1990-2001 and then chairman until 2011, during which time Coty again became an independent company with almost 14 times revenue growth. Harf also has served as chairman of AB InBev.

Coty also created a three-person executive committee. Besides Harf, members of the executive committee will be Pierre-André Terisse, Coty’s chief operating officer and CFO, and Gordon von Bretten, who joined Coty last week as the company’s first chief transformation officer.

Coty‘s senior management team will consist of the members of the executive committee, as well as Edgar Huber, chief commercial officer; Simona Cattaneo, president luxury brands; Richard Jones, chief supply officer and head of research and development; Pascal Baltussen, chief global procurement officer; Laurent Mercier, deputy CFO; Kristin Blazewicz, chief legal officer; and Anne Jaeckin, newly appointed to the position of chief human resources officer.

Pierre Laubies stepped down as CEO on May 31. Given the new management structure, Pierre Denis will not take up an executive position with the company and has stepped down from its board. He will remain a senior advisor.

“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,” Harf said. “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.”

“We are excited about our future collaboration with Peter Harf and the team at Coty,” Huth said. “The company has tremendous potential and this transaction will position the business to deliver long-term value creation. Coty and Wella alike are going to benefit significantly from the transformation journey ahead.”

Coty is a beauty company with a portfolio of brands across fragrance, color cosmetics, hair color and styling, and skin and body care.