Shares in Coty (COTY) jumped 21% in pre-market trading amid a report that the cosmetics maker agreed to buy a 20% stake in Kim Kardashian West’s make-up brand KKW for $200 million.
The stock surged to $5.05 in Monday’s pre-market trading. The deal values the three-year-old company at $1 billion, slightly less than the $1.2 billion valuation Coty put on Ms Kardashian West’s younger sister Kylie Jenner’s business when it bought a 51% stake last year, the Financial Times reported on Sunday.
Coty is only snapping up a minority stake in KKW this time given its heavy debt load and a global economic downturn triggered by the coronavirus pandemic. Under the terms of the deal, the cosmetics maker has an option to buy a majority stake in KKW at a later stage.
No details on KKW’s sales or profits were disclosed. The KKW deal marks the latest attempt by Coty’s majority shareholder, JAB Holdings, to try and turn around the unprofitable cosmetics group whose shares have fallen 63% so far this year. By bringing a big social media star into the fold, Coty is trying to modernise its own portfolio of make-up brands.
The reported deal comes just months after the collaboration agreement with Kardashian’s sister Kylie Jenner. Coty acquired a controlling stake in Kylie Jenner’s cosmetics company, Kylie Cosmetics, for $600 million.
Ms Kardashian West’s company sells its lines of lipsticks, eyeshadows, foundations and powders mostly through its own website, giving it better margins than some bigger brands that rely on selling wholesale in department stores. KKW is expected to soon expand into skincare products, which have become the fastest-growing segment of the cosmetics industry, the Financial Times report said.
Wall Street analysts are mostly sitting on the fence when it comes to Coty stock. The Hold consensus consists of 6 Hold ratings versus 1 Buy rating. Yet with the sharp share decline this year, the $6 analyst average price target implies 44% upside potential over the coming 12 months. (See COTY stock analysis on TipRanks).
"Difficult operating environment for COTY and unfortunately things will likely get worse before they get better" summed up RBC Capital's Nik Modi. However, the stock's lone bull added that he believes "management is making the right structural decisions (i.e. cost cutting, shifting decision making to be more local) to position the company well for a post-COVID environment."
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