Updated 3:07 p.m. ET March 24
It was a tale of two stocks Tuesday, as investors began to digest the prospects of a merger between the Estée Lauder Cos. and Puig.
The market smiled broadly on Puig, whose shares shot up less than a day after the two companies each confirmed in separate statements that they are in talks.
The Spanish beauty and fashion company’s stock closed up 13 percent to 17.59 euros.
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In contrast, the Estée Lauder Cos.’s stock closed almost 10 percent lower at $71.48 on Tuesday, having ended down 7.7 percent Monday, the same day the discussions were announced.
The news of a possible deal came following market speculation that the Estée Lauder Cos. could be an acquisition target for Unilever, following that company’s plan to sell its food division and increase its beauty focus, according to Jefferies.
Neither Puig nor the Estée Lauder Cos. has revealed any specifics about their talks, but reports suggest a merger deal would involve a combination of cash and stock. Analysts estimate the merged entity would be valued at more than $40 billion.
There are numerous plus sides to a deal.
“The combined business would have revenues of just over $20 billion, and would give Estée Lauder a larger fragrance portfolio and diversify exposure to Europe and Latin America, whilst the opportunity for Puig would be part of wider and more balanced beauty group,” Céline Pannuti, head of European staples and beverage research at J.P. Morgan, wrote in a note.
She said, however, there could be anti-trust issues for prestige makeup in the U.S., where Estée Lauder is a leading player and Puig’s Charlotte Tilbury brand ranks third in prestige makeup.
“We are surprised that the Puig family would relinquish independence and majority control — even if it retains its economic interest — of the 112-year-old group and given the recent market introduction,” Pannuti wrote.
Further, this comes just one week after Marc Puig stepped down as company chief executive officer after 22 years, handing the role to Jose Manuel Albesa, while retaining the executive chairmanship position.
J.P. Morgan believes potential interest from other industry players could emerge.
For the Estée Lauder Cos., Jefferies views a transaction as financially attractive on paper, with about 15 percent earnings-per-share accretion pre-synergy-wise, but less compelling from a portfolio-construction perspective.
“The deal would increase exposure to prestige fragrance and skin care — both coming off peak growth rates,” Sydney Wagner, a Jefferies equity analyst, wrote in a note. “It also adds complexity amid an ongoing turnaround and does not address value-mixing behavior or potential category rotation.”
Crunching the numbers further, Oliver Chen, of TD Cowen, estimated that a combined Estée Lauder and Puig would shift the former’s current global split from 30 percent Americas, 50 percent APAC and 20 percent EUKEM toward roughly 31 percent Americas, 35 percent Asia and 33 percent EMEA and other.
“Product mix would also rebalance materially, with fragrance rising from 18 percent of Estée Lauder’s sales to 33 percent pro forma, alongside 38 percent skin care, 25 percent makeup and 5 percent hair care and other,” he continued. “In our view, this mix is closer to global beauty demand patterns and reduces reliance on skin care, while increasing exposure to a category with longer product life cycles, better margins and more durable demand.”
Barclays on Tuesday published a note titled “First Glance, Doesn’t Make Scents.”
“While likely financially accretive to [Estée Lauder Cos.], we believe the potential acquisition of Puig would be dilutive to the company’s Beauty Reimagined turnaround strategy,” wrote Barclays analyst Lauren Lieberman, who has commended the Estée Lauder Cos. for its progress under the plan. “This is why, at first glance, we believe the potential acquisition of Puig would veer Estée Lauder off course. That is, we have a hard time seeing how anything about acquiring Puig would fit with the five strategic pillars of Beauty Reimagined.”
Beauty Reimagined includes everything from a radical organizational restructuring to a plan for increasing innovation, expanding distribution and accelerating efficiencies, all while injecting agility and speed into the organization.
Regarding M&A, Barclays said it would prefer seeing Estée Lauder take minority interests in regional brands, such as Xinu or Forest Essentials, or acquire small, fast-growing brands.
“Should this transaction come to fruition, while from a financial perspective Estée Lauder would be acquiring a higher-margin — Puig EBITDA margins are about 21 percent as compared to Estée Lauder’s current 15 percent — and faster growth business, we worry about the sustainability of the latter,” Lieberman wrote. “In particular, while Puig’s top-line growth has trended in the plus 6 to 8 percent range it tracks the global fragrance industry and with a portfolio mix that skews heavily toward prestige priced designer rather than niche luxury brands.”