Does Coty Have the Sweet Smell of IPO Success?

The fragrance maker’s deal is getting lots of buzz

   

Fragrance maker Coty is expected to pull off its initial public offering tomorrow, and it should be a tantalizing deal.

The company plans to sell 65.7 million shares (under the ticker “COTY” on the New York Stock Exchange) at a range of $16.50 to $18.50 and the lead underwriters include Bank of America (BAC), JPMorgan (JPM) and Morgan Stanley (MS).

Founded 109 years ago, Coty is now the No. 2 player in the global fragrance market — competing against biggies like Avon Products (AVP), Estee Lauder (EL) and Elizabeth Arden (RDEN) — and it’s one fast-growing market. For Coty’s part, revenues have posted an average gain of 16% from fiscal 2010 to 2012, reaching $4.6 billion, and adjusted operating income went from $284.4 million to $535.9 million during that time.

A key to the company’s success has been the savvy leveraging of celebrity-based brands, including Jennifer Lopez’s Glow, Beyonce’s Pulse and Lady Gaga’s Fame.

At the same time, Coty has built an extensive distribution footprint, focusing on both North America and Europe. Its partners include some of the world’s most elite luxury stores, as well as mainstream retailers like Walmart (WMT).

Another important part of the growth strategy: acquisitions — like the $400 million buyout of TJoy Holdings. The focus seems to be on emerging markets, especially in China, where the company is a top operator in the skin-care market.

But not all deals have worked out, as seen with last year’s attempted purchase of Avon for $10.7 billion. True, the bid got the support of Berkshire Hathaway’s (BRK.B) Warren Buffett … but in the end it wasn’t enough money, and Avon walked away from a deal.

Despite all this, the dealmaking is likely to continue at Coty.

By virtue of being a public company, Coty has the added advantage using of its stock as currency. It also helps that the controlling shareholder of Coty is Joh. A. Benckiser GmbH — or JAB — which is the investment arm of Germany’s billionaire family, the Reimanns. The money managers have extensive experience with M&A in the consumer space. Some of their transactions include Labelux Group GmbH (which owns  brands like Belstaff and Jimmy Choo) as well as deals for Peet’s Coffee & Tea and Caribou Coffee.

As should be no surprise, Coty still has some issues — perhaps most importantly, the company’s heavy concentration in Europe, where the economy remains sluggish with few signs of change.

The fragrance business also is subject to the whims of consumer fickleness. Here’s how Coty talks about this in the Risk Factors section of the S-1:

“While we devote considerable effort and resources to shape, analyze and respond to consumer preferences, consumer tastes cannot be predicted with certainty and can change rapidly. Additionally, due to the increasing use of social and digital media by consumers and the speed by which information and opinions are shared, trends and tastes may continue to change even more quickly.”

The good news is that Coty seems to be handling the challenges fairly well, and should come to market with a decent valuation compared to its peers, trading at 11 times EBITDA, compared to 14X for Estee Lauder and 12X for Avon.

So in light of Coty’s strong portfolio brands and healthy growth rates, the IPO is likely to get a nice reception tomorrow.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


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