Analysts Speculate On P&G Beauty Bundle Up For Possible Sale, IPO

P&G could divest, at one fell swoop, prestige fragrances, makeup brands Cover Girl and Max Factor, and salon and small retail hair-care brands, analysts speculate, following reports that the firm is exploring a possible sale or IPO of beauty brands en masse.

Procter & Gamble Co. reportedly may bundle a number of its non-core beauty brands in a single sale or initial public offering, a move that would propel the firm closer to its goal of managing 65 leading brands with improved focus, efficiency and capacity to win.

Bloomberg reported March 16 that the Cincinnati-based consumer-goods giant is exploring options for selling or carving out a number of beauty brands under its ongoing streamlining program, aimed at shedding 100 underperforming brands in deals expected to be negotiated and announced largely by this summer (Also see "Slimmed-Down P&G To Consist Of 65 ‘Leading Brands’ By FY 2017" - HBW Insight, 23 Feb, 2015.).

According to the business news outlet, the firm has not finalized details and may not follow through with the separation.

Analysts have speculated that fragrance, makeup, and salon and small retail hair-care brands could be on P&G’s chopping block. In a March 16 note, Deutsche Bank Market Research analyst Bill Schmitz, Jr. provides some math supporting the prospect of their being sold en masse or spun off into a standalone business.

He estimates that such offerings – including the firm’s Wella Professional business, rumored in late 2014 to be at the center of a potential deal – generate roughly $6 billion in sales (Also see "Kao Is ‘Best Fit’ For P&G’s Rumored Wella Divestiture – Euromonitor" - HBW Insight, 20 Jan, 2015.).

Schmitz’s calculation values the entities as follows, in sales terms:

• Prestige fragrances, $2.5 billion
• Wella Professional, $1.5 billion
• Retail colorants (such as Clairol), $1 billion
• Cover Girl and Max Factor makeup brands, $850 million
• Other small retail hair-care brands, $200 million

P&G already has announced divestitures totaling around $5.3 billion in sales, so the $6 billion in beauty brands – plus Braun, also seen as a business P&G is likely to exit – would amount to approximately $12.1 billion, according to the analyst.

Schmitz notes that P&G has indicated that ultimately its divestitures will total around $12 billion in sales, a target up from $8.2 billion when the streamlining initiative launched.

Among P&G brands divested to date, Schmitz cites Duracell ($2.5 billion), pet food names Iams and Eukanaba ($1.7 billion), Ace bleach ($250 million), skin-cleansing brands Camay and Zest ($250 million) and smaller brands including Puma fragrances that account for roughly $600 million (Also see "In Brief" - HBW Insight, 5 Jan, 2015.).

The analyst believes the firm could look to execute a Reverse Morris Trust for its remaining non-core beauty brands. A tax-efficient move for companies that have a buyer lined up, the strategy involves spinning off unwanted assets into a subsidiary with which the buyer merges, creating an unrelated entity majority-owned by the original parent company’s shareholders.

Other analysts reacted optimistically to reports of a potential beauty-brands transaction in the works. In a March 17 note from BMO Capital Markets, analyst Connie Maneaty says separating out beauty would “take PG back to core competencies that rely less on fashion and more on the characteristics in staples that it knows well how to navigate. It also suggests a big move that could finally unlock trapped value,” she adds.

In the event of a carve-out, the “more complicated” standalone beauty business “could be managed with a single-minded focus, while the personal-care and household products staples could be managed with the efficiency for which PG has historically been known,” she suggests.

Synergies Don’t Justify Brands’ Retention

BTIG consumer analyst April Scee agrees in her March 16 note that a beauty sale or spin-off would be a positive direction for P&G to take. Most likely to go, from her point of view, are salon hair care, premium fragrances and other premium brands such as SK-II skin care, picked up in P&G’s 1991 acquisition of Max Factor.

She notes that P&G’s premium beauty offerings target “a non-core consumer in non-core channels” and that divesting those along with salon hair-care brands would enable the firm to focus on Olay and Pantene, both named as investment focuses for the company. The latter in particular represents a turnaround “work in progress” as P&G takes steps to buoy declining sales in its beauty business (Also see "P&G Portfolio Trimming ‘Full Steam Ahead’ As Currency Effects Pummel Profit" - HBW Insight, 29 Jan, 2015.).

“SK-II and premium fragrance are both good businesses, but having such large brands outside core distribution unnecessarily fragments [P&G’s] mass market efforts. Synergies with mass skin care on innovation and diagnostics don’t justify the distraction in our view,” Scee writes.

As for salon hair care, the analyst notes that salon trends tend to filter down to mass. “Still, we don’t think [P&G] needs to own salon brands to monitor the current trends,” she says.

P&G’s beauty business generally has been viewed as creating a drag on its overall performance in recent years, while foreign exchange effects in recent quarters have substantially offset progress in its brand rationalization and cost-cutting initiatives.

The firm’s stock, trading at $81.82 at close of business March 13, shot up more than 2% following reports of the potential beauty transaction, but has since tapered off to $82.10 in midday March 18 trading.