Coty (COTY) stock hit all-time highs on Tuesday after the New York Post reported that the cosmetics company purchased several beauty businesses of Procter & Gamble (PG) at auction.
The cumulative value of the three winning bids is thought to approach $12 billion and include P&G’s hair-care lines, the Max Factor and CoverGirl brands.
As Procter & Gamble tries to sell off inessential segments to focus on its core business, COTY is also trying to focus on what it does well: all things beauty.
Before the announcement of the deal, the value of all COTY stock and debt was only worth $12 billion in and of itself, so these deals will effectively double the size of the company’s balance sheet. That was good enough for Wall Street, which sent shares up as much as 19% on the news.
Why the Deal Happened
COTY stock, which InvestorPlace tapped as one of 3 personal products stocks to buy now back in February, is easily one of the best performers in the stock market today. But it also saw a huge surge in volume: by 2PM, more than 8 million shares had changed hands, compared to its average daily volume of 1.2 million.
Shares are now up almost 40% since Coty stock was recommended on February 10.
Coty, which before the deal had 10 “power brands” in its beauty portfolio including the likes of Calvin Klein, Marc Jacobs, Playboy, Adidas (ADDYY), and Sally Hansen, saw its revenue growth slow markedly between fiscal 2011 and fiscal 2013. In 2011, revenue grew at a 17% clip. Two years later, sales grew just 0.8%, and in fiscal 2014, sales actually fell 1.8%.
Analysts were expecting this troubling trend to continue, with revenues projected to fall 3.8% in fiscal 2015, which goes until June 30.
The deal essentially will only begin to have an effect in fiscal 2016, and will obviously get sales growth moving in the right direction again on paper. I can see several reasons why COTY stock would be soaring today. In addition to boosting its market share overnight, Coty can achieve synergies that few other companies could hope for, being that it’s an entrenched player in the beauty industry already.
It should also allow Coty to compete more effectively against rivals like Estee Lauder (EL) — rivals who presumably had a chance to participate in the very same Procter & Gamble auction as Coty did.
With the details of how Coty plans to finance these massive purchases as yet unknown, investors should be cautious not to pile into COTY stock too suddenly. Although it would be foolish not to heavily fund the deal with debt — given today’s low interest rate environment — the company could always help fund the transaction by issuing more shares and diluting stockholders.
Only time will tell, but one thing’s for certain: Coty just bought its way into the big leagues.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
