Laying it on thick

Coty's $12.5 bn P&G deal has too much makeup

Coty is slapping the makeup on its $12.5 billion purchase of Procter & Gamble's beauty business. The fragrance giant is touting $550 million of cost savings from the deal. But that overstates the financial benefits of a tie-up that will take time and money to consummate.

Buying P&G brands including Dolce & Gabbana cologne, CoverGirl makeup and Wella shampoo will double Coty's revenue. That will give recently confirmed Chairman and Chief Executive Bart Becht a solid foundation to build a more formidable competitor to the likes of $95 billion cosmetics rival L'Oreal.

Becht, a respected deal-maker who delivered superior shareholder returns during his stint at the helm of Reckitt Benckiser in the 2000s, shouldn't be underestimated. But Coty is laying it on thick with its synergies estimates. They amount to 10 per cent of the acquired assets' revenue last year - far more than the four per cent implied by the 20 per cent jump in Coty's stock when rumours of a deal surfaced last month. Some $400 million, though, consists of P&G headquarters costs borne by the ejected brands that won't be transferred to Coty. Its shareholders will benefit, but it's by no means an active strategy to create extra value.

The savings Becht and his lieutenants reckon they themselves can carve out is $150 million. That's worth around $1.1 billion to shareholders, once taxed and capitalised - far less than the $1.8 billion boost in Coty's market value last month.

That comes with caveats. The transaction - a complex structure known as a reverse Morris Trust - won't close until the latter half of next year. Most of the cost cuts will take a couple of years to materialise. And Coty expects to invest an extra $400 million and eat $500 million of one-off costs to get its organisation in shape to run a much larger business.

On top of that, it's not yet clear exactly how much debt Coty will absorb in the deal - that has been tied to how its stock performs before it closes.

So far, Coty's shareholders have corrected for their recent over-exuberance by lopping almost 6 percent off the share price by midday trading. That's worth almost $700 million, implying they have, at least, seen through some of the gloss.