Coty Inc. has recently announced that they had reached a “definitive agreement” that would merge the company with Procter & Gamble’s (P&G) beauty business. The said merger covers The Procter & Gamble Company’s fine fragrance, color cosmetics and hair color businesses. Moreover, the transaction between the two beauty companies was done through a Reverse Morris Trust, making the merger tax-free.
A Reverse Morris Trust is actually defined by Investopedia as a “tax-avoidance strategy.” That is, a parent company looking to sell certain assets to a smaller external company may do so by creating a subsidiary and having the small external company merge with the newly formed subsidiary, creating a company that is unrelated to the parent company.
Moreover, shareholders of the parent company should also hold control of over 50% of voting rights and value of the said unrelated company. Should this happen, the Reverse Morris Trust has been successfully completed. And in the case of P&G, this is how the company has managed to transfer its beauty business without taxes.
In satisfying the conditions of the Reverse Morris Trust, Coty, Inc. has stated in its recent investor presentation that shareholders of Coty shall own 48% of the combined company while shareholders of P&G 52% of “all outstanding shares on a fully diluted basis (inclusive of outstanding equity grants).”
Coty Inc. has also valued P&G beauty business at $12.5 billion at the time the proposal was made. Furthermore, as P&G is yet to decide on whether the merger will result in a spin-off or split-off, Coty has stated that should P&G elect for the latter, shareholders of P&G may choose to exchange their P&G shares to shares a of newly formed company representing P&G’s beauty business called Newco. As of the moment, P&G has yet to make a final decision but states preference for a Reverse Morris Trust split-off.
Of the merger, Coty Inc. Chairman and Interim Chief Executive Officer Bart Becht says, “With the Beauty talent from both sides and the fantastic portfolio of world-class brands, we have the opportunity to create a highly focused, pure-play leader and challenger in Beauty which can deliver exciting opportunities and benefits for employees, licensors, customers and suppliers. There is no question that with the broader offering of leading brands, strong brand support, the development of a better pipeline of innovative products and the much broader geographical reach and scale, Coty will strengthen its competitive position and ability to capitalize on revenue and profit growth opportunities over time.”
Meanwhile, P&G Chairman, President and Chief Executive Officer, AG Lafley who calls Coty “a strategic acquirer,” has remarked the merger will mean that there will be “an excellent new home for these businesses and brands, as well as for the talented people who are operating them.”
The merger is expected to a lot of good for Coty as based on the result of fiscal year 2014, Coty and the P&G beauty business would have over $10 billion in pro forma revenues combined. It will effectively double the size of Coty, pre-merger.
Revenue of the P&G beauty business was about $5.9 billion during the fiscal year that ended June 2014. Meanwhile, P&G has said that it expects a one-time gain of anywhere between $5 billion and $7 billion as a result of the merger.
The said merger will include 43 P&G beauty brands including Covergirl, Max Factor, Alexander McQueen, Stella McCartney, Clairol Professional, Sassoon Professional, Color Charm, Dolce & Gabbana, Gucci, Hugo Boss, Lacoste, Christina Aguilera, Escada, James Bond 007, Gabriela Sabatini, Nice & Easy, Natural Instincts and Wellaton.
Meanwhile, P&G has said that it hopes to close the transaction during the second half of 2016, subject to regulatory approvals.