How Analysts View a Possible Puig-Estée Lauder Cos. Merger

PARIS – The market smiled broadly on Puig, whose stock shot up hours after news broke that the company is in merger talks with the Estée Lauder Cos.
At 10:45 a.m. CET, the Spanish beauty and fashion company’s stock was up 13 percent to 17.59 euros.
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By contrast, the Estée Lauder Cos. stock closed 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 value 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,” Panutti 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.”