BREAKINGVIEWS-Estée Lauder’s Puig approach fails the smell test

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Yawen Chen

LONDON, March 24 (Reuters Breakingviews) - Estée Lauder EL.N is sniffing around Puig Brands PUIGb.MC, but the fragrance of any combination may hold little appeal for the larger company's shareholders. The roughly $30 billion U.S. cosmetics group on Monday said it was talking to its near-$10 billion Spanish perfume peer about a merger. The numbers, and power dynamics, suggest Estée could end up overpaying.

The strategic logic is clear for the controlling Lauder family, which has over 80% of the company's voting power. Estée leans heavily on China, where demand has been patchy. By contrast Puig - pronounced "pooch" in the Catalan language - is a fragrance powerhouse less exposed to the People's Republic, with about three-quarters of its revenues in scents, a segment that has proved more resilient. Its operating margins are also higher, based on analyst forecasts gathered by Visible Alpha, at roughly 16% this calendar year compared with 11% for Estée.

Puig, also controlled by its eponymous founding family with a 90%-plus voting stake, seems to have greater bargaining power. First, there are other possible bidders, like $213 billion L'Oréal OREP.PA, which recently bought Kering’s PRTP.PA beauty division. And while Puig's shares have performed poorly since a 2024 initial public offering, the clan has little incentive to sell its 112-year-old group at a major discount to that level. They may seek to retain influence over the combined group, potentially implying that Estée will have to make a richly-priced offer with a large share-based element. Another option is to try to extend super-voting stock to the Puig family.

This all points to a poor deal, from the perspective of Estée's minority shareholders. Assume a 20% premium to Puig's Monday closing level, and the purchase price including net debt would be $13 billion. Jefferies analysts wrote on Tuesday that annual cost and revenue benefits could be 6% of Puig's sales, or roughly $380 million. Add that to Puig’s forecast 2029 operating profit using Visible Alpha estimates, and tax the lot at 25%. The return to Estée after three years would be $1.1 billion, or just 8.7% of the hypothetical purchase price in this scenario. That is below a weighted average cost of capital for the target company of 9%, as estimated by Jefferies.

That is hardly compelling, perhaps explaining the 8% collapse in Estée's share price on Monday. There may also be question marks on antitrust for high-end make-up in the U.S. market, JPMorgan analysts reckon, with Estée a leading player and Puig’s Charlotte Tilbury the number three brand in that category. And then there are the potential governance risks from having two founding families with chunky stakes.

In short, Estée may gain a stronger foothold in fragrances and a prized asset, but at a price that leaves little room to create any value. Not that minority shareholders in the larger company can do much about it, given the grip of the Lauder family. Puig's stock surged 13% on Tuesday. Like many deals in the luxury sector, most of the value in this case may accrue to the sellers.

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CONTEXT NEWS

Estée Lauder and Puig Brands on March 23 said they were in discussions about a possible merger, confirming an earlier Financial Times report.

The two companies have discussed a combination involving a mix of cash and stock, the Wall Street Journal reported on March 23 citing people familiar with the matter.

Shares in Estée Lauder closed 7.7% lower on March 23. Puig’s shares rose 13% as of 0900 GMT on March 24.

(Editing by Liam Proud; Production by Shrabani Chakraborty)

((For previous columns by the author, Reuters customers can click on CHEN/yawen.chen@thomsonreuters.com))