- Cosmetics company Coty Inc (NYSE: COTY) announced it has named Chairman Peter Harf as the chief executive officer of the company
Cosmetics company Coty Inc (NYSE: COTY) announced it has named Chairman Peter Harf as the chief executive officer of the company. Harf is the fourth new chief executive officer of the company in less than four years.
And Coty Inc (NYSE: COTY) also revealed the signing of a definitive agreement with KKR as part of a strategic transformation that is going to deleverage its balance sheet, streamline operations, and strengthen the leadership team.
As part of 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. Going forward, KKR will own 60% of this separately managed entity and Coty will own the remaining 40%. And as previously announced, KKR is investing $1 billion directly into Coty through the issuance of convertible preferred shares.
The investment from KKR brings significant benefits to Coty. For example, 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) will improve Coty’s leverage profile thus providing the company with the flexibility to navigate through the current challenges and continue investing in its brands. And KKR is committed to bringing meaningful resources to Coty from day one, including adding one of the firm’s most experienced investors to Coty’s Board: Johannes Huth, Partner and Head of KKR EMEA. Plus KKR will also nominate a second Board member in the near term.
“We are excited about our future collaboration with Peter Harf and the team at Coty. 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,” explained Huth.
The sale of a majority interest in the Professional and Retail Hair business will simplify Coty’s portfolio and will allow Coty to focus on its main Prestige and Mass Beauty businesses. For 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. And for Mass Beauty, Coty will reinvest in its brands in priority markets to improve business fundamentals and expand its omni-channel presence for brands that include Sally Hansen, Rimmel, CoverGirl, and Max Factor.
Excluding the Wella business, Coty is aiming for a net reduction in fixed costs of approximately $600 million in cash over the next 3 years, equating to 25% of its pro forma fixed cost base. And the one-off costs associated with this program are estimated at $500 million. Combined, these measures will drive strong financial improvement at Coty through FY23 with the company continuing to expect adjusted operating margins in the mid-teens and leverage of below 4x.
KKR’s $1 billion investment in Coty is via convertible preferred shares. And 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. And assuming full conversion, JAB will remain Coty’s largest shareholder with 50% ownership in the company. KKR will be the second largest shareholder with a 17% stake.
The majority investment in Wella from KKR values the business at $4.3 billion on a cash- and debt- free basis. And this equates to 12.3x FY19 adjusted EBITDA of ~$350 million on a fully-allocated basis — which includes approximately $160 million of central costs which will not transfer as part of the transaction.
Upon 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 is going to 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 $0.4 billion from the dividend distribution, net of $0.2 billion relating to debt items and $0.3 billion of tax and transaction fees.
Peter Harf’s Background
Harf is Founder and Managing Partner of JAB Investors, which is an investment firm with more than $100 billion of assets under management. And Harf has extensive industry experience, including through his previous roles as Chairman and CEO of Benckiser N.V. and then Deputy Chairman of Reckitt Benckiser — which he formed through the merger of Benckiser N.V. with Reckitt Coleman in 1999.
While heading up Benckiser, Harf built modern-day Coty and spent over 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. And Harf has also served as Chairman of AB InBev.
The creation of a three-person Executive Committee is going to allow Coty to increase the speed of its decision making and execution and create clear accountability for improved performance. And besides Harf, members of the Executive Committee will be Coty’s Chief Operating Officer and Chief Financial Officer, Pierre-André Terisse, and Gordon von Bretten — who joined Coty last week as the company’s first-ever Chief Transformation Officer (CTO).
Von Bretten — who joins from KKR Capstone — will draw on his 25 years of experience in transforming businesses to accelerate the pace of change at Coty. And he will oversee the ‘All-In To Win’ transformation agenda. Plus the new Executive Committee will make sure that Coty takes the right steps towards becoming a more profitable business and delivering on its commitments. It will also set clear priorities and hold itself and the Coty organization accountable to drive improvements across the business.
Coty‘s senior management team is going to consist of the members of the Executive Committee along with: 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 Chief Financial Officer; Kristin Blazewicz, Chief Legal Officer; and Anne Jaeckin, newly appointed to the position of Chief Human Resources Officer.
Pierre Laubies stepped down as Chief Executive Officer on May 31, 2020. With the new management structure, Pierre Denis will not take up an executive position with the company and has stepped down from its board. Going forward, he will remain a Senior Advisor, which will allow Coty to utilize his extensive knowledge and experience in the luxury industry.
“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,” said Harf.
