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As Gaga, Beyoncé fragrance sales slip, Coty offers Chanel 4% stake for a cosmetics brand

October 7, 2014, 4:49 PM UTC
Lady Gaga Launches Debut Fragrance, Fame At Harrods, London
LONDON, ENGLAND - OCTOBER 07: Bottles go on display at Harrods London to celebrate the launch of debut Lady Gaga fragrance, Fame at Harrods on October 7, 2012 in London. England (Photo by Dave J Hogan/Getty Images for Coty Beauty UK)
Photo by Dave J Hogan 2012

Coty, (COTY) the world’s second largest fragrance maker, has offered Chanel 15 million shares, or a 4.4% stake, for the Bourjois cosmetics brand as it seeks to lower its exposure to the North American fragrance business that has been a drag on its sales.

Coty’s revenue in the year that ended June 30 fell 2% to $4.551 billion. The decline was largely because sales of fragrances by Lady Gaga, Beyoncé and Vera Wang, along with cosmetics, fell in North America, where overall sales were down 9%. (To be fair to those celebrity fragrances, the decline was partly attributable to the absence of new launches.)

The company, founded in 1904 in Paris, has been trying to diversify its product mix to be less reliant on fragrances, which generate more than half of its sales. It has also been trying to get a bigger foothold in Asia, something the Bourjois deal, which Chanel has agreed to consider, would help.

The offer comes at a bumpy time for Coty. Its CEO resigned last week for unspecified “personal reasons,” just weeks ahead of the beauty company’s annual meeting. And shares are trading at $15.94, below the $17.50 its shares were priced at in its initial public offering in June 2013.

Coty has also been hurting because mass U.S. retailers such as Wal-Mart Stores (WMT) have been cutting back on orders. Wal-Mart alone generates 6% of Coty’s overall sales. (That has been the same issue that has decimated Elizabeth Arden’s (RDEN) sales.) Ergo the bigger push on outside markets, such as Western Europe, and color cosmetics, a fast growing segment of the beauty industry that accounts for 30% of Coty’s sales.

“Bourjois’ brands are highly complementary to Coty’s existing color cosmetics portfolio,” Bart Becht, Coty’s chairman and interim CEO, said in a statement. The deal is binding on Coty if Chanel accepts it. Becht is chairman at JAB Advisors, Coty’s majority shareholder. JAB, a vehicle of Germany’s Reimann family, controls almost all of Coty’s voting shares.

J.P. Morgan analyst John Faucher estimated Bourjois’ annual sales are above $200 million. The brand, founded in 1863 by French actor Joseph-Albert Ponsin, is sold in more than 50 countries.

And with Becht, a renowned dealmaker in the consumer products industry as CEO of Reckitt Benckiser from 1999 to 2011, at the helm, more Coty deals could be in the offing, Faucher wrote in a note.