Global investment firm KKR will acquire a majority stake in Coty’s Professional Beauty and Retail Hair Businesses. The $4.3 billion deal will include Wella, Clairol, OPI and ghd brands. According to Coty, KKR will provide the company with an initial investment of $750 million.

“Coty is a leader in the attractive global beauty market with iconic brands, global presence and scale, and a strong track record of innovation and growth,” said Johannes Huth, partner and head of KKR EMEA. “We are excited to form this partnership to invest in Coty to support it through this period of unprecedented global uncertainty and allow it to emerge as a stronger, more agile business, and to acquire a majority stake in Wella, a market leader with a strong portfolio of brands in the attractive professional hair market where we see significant opportunities to accelerate growth in partnership with its experienced leadership team. We look forward to working towards the establishment of a lasting and value-creating strategic partnership.”

Analysts note, however, that the deal comes as the professional hair care sector is reeling.

“If a deal had been reached by the end of 2019, the outcome likely would have been different,” said Susan Babinsky, SVP, Kline's Management Consulting.

With COVID-19 raging across the globe in earnest in early 2020, the professional beauty business has been among the hardest hit, with salon shutdowns bringing this high-touch service industry to a virtual halt. In the US alone, Kline estimates that salon hair service revenues dropped by over $5 billion in Q1 alone (based on Kline’s Impact of COVID-19 on the Salon Hair Care Market). Given this bleak outlook, the dynamics of the Coty Professional Beauty deal shifted, giving the upper hand to KKR, with Henkel’s position as a strategic buyer weakened due to the challenging current and future state of the salon industry, according to Kline.

The strategic partnership involves the sale of a 60% majority stake in Coty’s Professional Beauty and Retail Hair Business, including the Wella, Clairol, OPI, and ghd brands, at a contemplated enterprise value of $4.3 billion. Coty will retain the remaining 40% interest in the business, which is No. 2 in the salon hair care industry behind world leader L’Oréal, along with OPI professional nail care, the number one global professional nail care brand (based on Kline’s Salon Hair Care and Professional Nail Care global studies). KKR faced a formidable opponent in Henkel which, for the second time, was a top contender for this business; it lost out to Coty in 2015 when Procter & Gamble sold the business.
 
“Today’s announcement with KKR provides an increased sense of energy and excitement for all of us at Coty,” said Pierre-André Terisse, Coty COO and CFO. “As part of a number of steps to continue Coty’s transformation, the strategic partnership with KKR is clearly the most game-changing. We will see immediate improvement to our balance sheet and are in the final stages of finalizing a 60/40 partnership for our Professional Beauty and Retail Hair businesses. In the shadow of a global lockdown, we have also announced a comprehensive plan to reduce fixed costs by $700 million, which allows us to confirm our target to reach mid-teens operating margins by FY23. Overall, this alliance and the steps we are taking to strengthen our businesses will be key elements of our transformation.”

Kline said that the company will be able to adapt and focus its resources based on the changes in hair and nail salons, along with variations in consumer behavior.

“In Asia, which is further ahead in COVID-19 recovery, Coty is likely to make further inroads with its successful Wella colorants business in China, Japan, and South Korea,” said Babinsky.

Coty is also advantaged in the U.S. market with its distribution strategy via Sally Beauty and position with independent stylists, as Kline expects more self-employed stylists in this new reality (source:Kline Independent Stylists: Global Market Brief beauty report). Kline also expects the OPI professional nail care brand to seek greater retail and online sell-through, as nail salon businesses are likely to suffer the greatest closure casualties in professional beauty.
 
Kline’s worst-case global forecast for professional beauty indicates the market will dip to $20 billion by 2024, contracting by approximately $5 billion from the $25 billion it registered in 2019.  We thus expect KKR will retain its ownership of Coty Professional Beauty throughout this period, perhaps selling it to Henkel at some point in the future. The next 12 to 18 months are critical for world health and the economy, with the health of the professional beauty business tied to this recovery. Kline is modeling COVID-19 impact and recovery with monthly updates for the global salon hair care industry.

Third quarter net revenue at Coty decreased 23.2% to $1.5 million.