World fragrance and cosmetics company Coty Inc. (NYSE:COTY) is expected to price shares on Wednesday or Thursday for its highly anticipated IPO. If you're not familiar with the Coty name, chances are you've seen its strong brands on television or in store. The company is a top ten leader in three industries: fragrances, color cosmetics, and skin & body care. Coty made headlines last year as the bidder for Avon Products (NYSE:AVP). Coty will now attempt a $1 billion IPO to split its company into a dual class share structure.
Coty was founded in 1904 in France. The company has been privately held by the estate of Joh. A. Benckiser since 1992. Benckiser, who made United States highlights by buying coffee brands Caribou and Peet's Coffee and Tea, will still own 69% of the company after the IPO. The Benckiser estate will also hold around 85% of the voting power, thanks to a dual class structure that gives Class B shares more voting power than the publicly traded Class A shares. Benckiser bought Coty from Pfizer (NYSE:PFE), who owned the company from 1963 to 1992. The purchase price from Pfizer was $440 million.
Coty will offer 57.14 million Class A shares in its IPO. Shares will trade under the symbol COTY on the New York Stock Exchange. The company plans on pricing shares between $16.50 and $18.50, but will likely see a higher offering due to already strong demand. After the offering there are expected to be 72.22 million Class A shares and 310.61 million Class B shares, for a total of 382.83 shares outstanding. Coty will pay an annual cash dividend of $0.15 in the second quarter of each fiscal year.
Coty is made up of a family of owned brands and licensed brands that operate around the world. The company has 10 power brands that made up 70% of fiscal 2012 sales. Those power brands are:
· Calvin Klein fragrances
· Davidoff Parfums
· Marc Jacobs fragrances
· Playboy fragrances
· Rimmel London
· Sally Hansen
Other brands in operation by Coty include fragrances under celebrity names like: Beyonce, Celine Dion, David Beckham, Faith Hill, Guess, Halle Berry, Lady Gaga, Madonna, and Tim McGraw.
Coty operates in three business segments. In fiscal 2012, the segments saw the following sales:
Fiscal 2012 Sales
$2.45 billion, +5%
$1.43 billion, +25%
$0.73 billion, +18%
% of 2012 Sales
Op Income Fiscal 2012
Last Nine Month Sales
$2.00 billion, +1%
$1.08 billion, +4%
$0.51 billion, -9%
Coty enjoys the #2 global position in fragrances, behind market leader L'Oreal. Coty also is the sixth largest color cosmetic company in the world. The company has expanded its market share in color cosmetics thanks to its recent acquisition of OPI. Coty is now the second largest color cosmetics company in all of Europe and fifth largest in the United States. This gives Coty the number six overall position in the color cosmetics world market.
In fiscal 2012, annual revenue increased 16% to $4.6 billion. Euromonitor represents that the three divisions Coty operates in have combined annual sales of $282 billion. This leaves Coty with plenty of room for international expansion and growth through acquisitions. The company did report a net loss of $301 million for fiscal 2012, due to several write downs and impairment charges.
· Portfolio of strong, well recognized beauty brands anchored by our "power brands" across three key beauty segments
· Global leader in fragrances
· One of the fastest growing players in color cosmetics
· Licensee of choice
· Superior innovation driven by entrepreneurial culture
· Product, channel and geographic diversity
· Compelling financial profile
· Successful integration of acquired brands and companies
· Experienced management team with proven track record
· Continue to develop our power brands portfolio
· Leverage innovation to strengthen our position in each distribution channel
· Diversify our geographic presence into new and emerging markets
· Expand and strengthen our position in skin & body care
· Leveraging our multi-channel distribution capabilities
· Increase margins and continue to improve cash flow generation
Coty has grown through a series of acquisitions. In 2005, the company purchased the fragrances unit from Unilever (NYSE:UL) for $800 million. That acquisition gave the company the perfume rights of Calvin Klein, Vera Wang and Chloe. Two of those brands are now included in the power brands top ten Coty brands by sales. In 2009, Coty entered a license agreement with GUESS for the use of their name on fragrances.
The last two years brought three of the top acquisitions that will lead the way going forward and one failed acquisition that helped Coty receive some international attention. In 2011, Coty bought Philosophy, a skin care company for $930 million. Coty also bought Tjoy for $351.7 million. Tjoy is expected to give Coty a strong sales distribution in China. Dr. Schellers was purchased by Coty for $54 million. OPI, the largest of Coty's 2011 acquisitions, was bought for $949 million. I expect all of these acquisitions to help Coty expand into new regional markets, with the interest in China through Tjoy obviously creating huge opportunities.
In 2012, Coty attempted to buy Avon Products for $10.7 billion. Coty had raised its price for the entire company, but never received contact or a meeting with Avon and withdrew its offer. I still see Coty going back and acquiring a large cosmetics company like Avon or Mary Kay. The purchase of Avon would have given Coty a strong sales presence in emerging markets like Brazil and Mexico.
Investors are given a pure play on fragrance, cosmetics, and skin care with the IPO of Coty. Other similar investment opportunities like this are with Estee Lauder (NYSE:EL), Elizabeth Arden (NASDAQ:RDEN), and L'Oreal. L'Oreal is the number one fragrance company in the world, while Estee Lauder enjoys a much larger percentage of sales from cosmetics and makeup than fragrances. Elizabeth Arden, with a small market capitalization could actually become the next big acquisition target of Coty's, once it is publicly traded. Coty also will compete with Avon and Mary Kay, for dollars from customers around the world.
When deciding how shares of Coty stack up against their peers, it's important to look at sales from the last fiscal year. With a market captilization of $26.28 billion, Estee Lauder trades at 2.7 times last year's sales. The company also trades at 2.6 times estimated forward annual sales of $10.20 billion.
Rival Elizabeth Arden, with a small market capitalization of $1.4 billion, trades at a much cheaper range. Shares trade at only 1.1 times last year's annual sales.
If we assume the mid-point of $17.50 per share and total outstanding shares of 383.8 million, shares of Coty will trade with a price to sales of only 1.5 times last year's sales. If the price jumps to $20 per share, as I believe it will, shares of Coty still trade for only 1.7 times last year's sales.
With this equation, you can see that Coty will most likely be offered to investors with a cheaper price to sales valuation than rival Estee Lauder. The company also will see better growth through recent acquisitions and dominance in all three categories.
Coty shares will price higher than their initial range due to demand. However, I think shares are still worth buying up to $22. Revenue is growing in all three sectors thanks to new products, acquisitions, and new country entry. Once public, I expect Coty to go after even bigger names in its acquisition quest, adding regional leaders and product leaders into its huge base of brands. This is the beauty company that should be in your portfolio going forward.