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Company: Coty Inc.

Exchange: New York Stock Exchange.

Symbol: (NYSE:COTY)

The Offer:

The selling stockholders are offering 57,142,857 shares of the Class A common stock. The company will not receive any proceeds from the sale of shares of the Class A common stock by the selling stockholders. The anticipated initial public offering price per share will be between $16.50 and $18.50.

Valuations after current offering:

Shares to be outstanding after offering

382,830,520 shares

Offer price (mid range) per share

$17.50*

Valuations at $17.50* per share

$6.69 billion

* The mid-point of the estimated range of the initial public offering price.

Summary:

Coty is a pure play beauty company with a portfolio of well-known brands that compete in the three segments in which it operates: Fragrances, Color Cosmetics and Skin & Body Care. The company holds the #2 global position in fragrances, the #6 global position in the color cosmetics and have a strong regional presence in the skin & body care.

The table below shows the segment wise revenues generated by the company in the last few years.


(Click to enlarge)

Its top 10 brands, which it refers to as its "power brands", generated approximately 70% of its net revenues in fiscal 2012.

Its top 10 brands are:

  • Playboy, Calvin Klein, Chloe´, Marc Jacobs and Davidoff (Fragrances).
  • Rimmel, Sally Hansen and OPI (Color Cosmetics).
  • Adidas (OTCPK:ADDDF) and Philosophy (Skin & Body Care).

The company manufactures approximately 66% of its products in the ten facilities around the world. These facilities are located in the United States, Spain, France, Monaco, the United Kingdom and China. Approximately 34% of its finished products are manufactured to its specifications by the third parties.

The company currently has offices in more than 30 countries; it sells and distributes its products in over 130 countries and territories. In fiscal 2012, its top ten retailers combined accounted for 29% of its net revenues and Wal-Mart (NYSE:WMT), its top retailer, accounted for 7% of its net revenues.

Financials:

Income statement analysis:


(Click to enlarge)

Key points from the income statement:

  • Steady rise in the revenues (nearly 17% in FY2011 & 12.5% in FY 2012).
  • Loss in FY 2012 due to the asset impairment charges of $575.9 million. (In the nine months ended March 31, 2012, the company recorded an impairment charge of $102.0 million, primarily related to the certain trademarks. In the fourth quarter of fiscal 2012, it recorded an impairment charge of $473.9 million, primarily related to the goodwill of $384.4 million and the certain trademarks of $89.1 million, resulting in total asset impairment charges of $575.9 million in fiscal 2012).
  • Expansion in the margins: Its operating margins are showing steady growth (without considering any impairment charges).

Operating margins (without considering any impairment charges)

FY 2010

FY2011

FY2012

5.45%

6.87%

7.94%

Balance sheet analysis:


(Click to enlarge)

Key points from the balance sheet:

  • Nearly 55% of the company's assets are in the form of the goodwill and intangible assets.
  • Heavy debts on the company's balance sheet.
  • Even if one considers just the long term debt of the company, even then the debt-equity of ratio the company is nearly 2.30 (not a good thing).

Industry outlook: (3.0% to 4.0% growth)

According to Euromonitor, the three segments of the beauty industry in which Coty competes generated the worldwide retail sales of approximately $282 billion in calendar year 2012. In fiscal 2012, Coty generated 77% of its net revenues in the developed markets and 23% of its net revenues in the emerging markets.

The industry growth rate of the fragrances, color cosmetics and skin & body care segments in the geographic markets where Coty competes was 3.7% from 2011 to 2012, based on Euromonitor data.

The growth rate in the areas in which Coty competes is expected to be 3.0% to 4.0% between 2013 and 2016, based on Euromonitor data.

Key positives and negatives points of the company:

Key positives:

1. The multi brand portfolio:

The company holds a portfolio of strong, well recognized beauty brands anchored by its "power brands" across the three key beauty segments.

The following chart displays some of its key brands by the segment.


(Click to enlarge)

2. Global reach:

The company currently has offices in more than 30 countries; it sells and distributes its products in over 130 countries and territories. This global reach will allow the company to tap every available growth opportunity and will also to some extent save it from any country/region specific slowdown.

The following table breaks down its net revenues by the geographic regions for the periods presented.


(Click to enlarge)

3. The multiple sales and the distribution channels:

It sells its products through retailers, including hypermarkets, supermarkets, independent and chain drug stores and pharmacies, upscale perfumeries, upscale and mid-tier department stores, nail salons, specialty retailers, duty-free shops and traditional food, drug and mass retailers.

4. Successful integration of the acquired brands and companies:

The company possesses the strong brand acquisition capabilities. Since 2002, it has successfully completed a number of acquisitions to drive the segment, geographic and distribution platform growth. The table below shows its most recent acquisitions and the amount spent on these acquisitions.


(Click to enlarge)

5. Margins: Its operating margins are showing steady rise (explained above)

Key negatives:

1. High dependence on the acquisition related (inorganic) growth:

During the last few years its revenue growth depends heavily on the additional revenues that the company generates from the acquisitions.

  • In the last two years, almost 83% of the company's incremental revenues are generated from the acquisitions made by it (see table below).


(Click to enlarge)

2. Balance sheet

Its balance sheet is not as strong as it should be. The debt-equity ratio of the company is nearly 2.30 (considering the long term debt only). The reason behind this high debt-equity ratio is the money spent on acquiring the assets in past, particularly in FY 2011 when the company spent nearly $2275 million on the four acquisitions (explained above).

3. High dependence on the economy.

4. Its business is subject to the seasonal variability.

Its sales generally increase during its second fiscal quarter as a result of increased demand by the retailers associated with the holiday season, and start to decline thereafter.

Offer evaluation: (Barring any unforeseen facts, and circumstances.)

  • Moderate risk low return.
  • Fully priced.

Since 2002, one key growth strategy of the company is to grow through acquisitions, but its current balance sheet will not allow it to consider any big acquisition in the near future, though its operational cash flows are good enough for any small acquisition. Its debt levels are high, so any big acquisition will put further strain on the company's balance sheet. So most probably for the next few years the company could have to deliver the growth mostly from its existing portfolio. It will be a very difficult task for the company to carry on its recent performance (the revenue and the margin expansion) further to next few years.

Net proceeds:

The company will not receive any proceeds from this offer.

Disclaimer: Investments in stock markets carry significant risk, stock prices can rise or fall without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets. This article reflects the personal views of the author about the company and one must read offer prospectus and consult its financial adviser before making any investment.

Source: IPO Review: Coty Inc. Is Fully Priced