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Morningstar | Coty's Shares Pop on Potential for Increased JAB Stake; Long-Term Thesis Remains Intact

On Feb. 12, Coty's largest shareholder, JAB, proposed a partial tender offer to acquire up to 150 million shares of its common stock. The offer price of $11.65 represents a 21% premium to the prior day's closing share price and 28% premium to the 90-day volume-weighted average share price, as well as a roughly 19 times multiple to the consensus earnings per share estimate (which strikes us as reasonable, as the multiples we've seen in the space are in the high-teens or above). JAB currently holds approximately 40% of shares, and, if all 150 million shares were purchased, its stake would increase to 60%.

While the proposed deal would give JAB even greater control of Coty's operations, we contend there is already a cozy relationship between JAB, Coty's board of directors, and Coty's management. Chairman Peter Harf (who took the spot from Bart Becht in November) had previously served as CEO of Coty (1993 to 2001) and chairman of Coty's board (from 2001 to 2011), and four of nine directors (including Harf) are affiliated with JAB. As a result, the announcement doesn't alter our Standard stewardship rating. We're also reiterating our long-term outlook for Coty, which calls for around 2% sales growth and low-double-digit operating margins on average over our forecast, as we gain a better understanding of new CEO Pierre Laubies' (appointed to the position in November) strategic priorities and plans for turning around the business. We still anticipate revising our $12.70 fair value estimate downward by a mid-single-digit percentage as we incorporate the firm's second-quarter results. Given a 12% uptick on the announcement (along with a more than 30% increase after the firm's earnings release on Feb. 8), we note that the margin of safety seems to be narrowing.