Puig shares pop on hopes of $40 billion beauty merger with Estee Lauder

By Gemma Guasch, Tassilo Hummel and Andres Gonzalez

PARIS/LONDON, March 24 (Reuters) - Shares in Puig PUIGb.MC, owner of fragrance brands including Jean Paul Gaultier and Rabanne, surged 13% on Tuesday after the Spanish firm and U.S. cosmetics giant Estee Lauder EL.N said they were exploring a merger that could help them keep pace with bigger rivals like L'Oreal.

A deal could create a $40 billion luxury beauty group with a strong foothold in perfumes, as beauty brands face headwinds from bleak demand in China to renewed inflation fears and reduced travel activity due to the Middle East conflict.

"Growth is shrinking, uncertainty is on the rise due to geopolitics and the Chinese market," said Stefan Bauknecht, portfolio manager at Deutsche Bank's DWS.

"Competition meanwhile is getting more intense, so consolidation and size is an answer if you want to win in this context."

The deal would give Estee Lauder, which has been grappling with weak sales of cosmetics brands like Bobbi Brown, Jo Malone and Le Labo, access to Puig's coveted perfume brands and direct-to-consumer sales channels. It would also make the U.S. group less reliant on its pressured home market and China.

The combination would come just months after French beauty giant L'Oreal OPER.PA bought the beauty assets of Gucci-owner Kering PRTP.PA, which Puig had also eyed, sources told Reuters at the time.

Puig has a total market capitalization of around 10 billion euros ($11.6 billion), including its unlisted shares, while Estee Lauder is valued at around $29 billion.

MOUNTING A CHALLENGE TO L'OREAL?

Financial details of the planned deal were not disclosed, but analysts said the transaction could come with a chunky premium to Puig's valuation if the family-controlled Spanish company gives up its independence after more than a century.

A deal with Estee Lauder would end Puig's bumpy two-year ride as a listed firm during which its shares have constantly declined, currently trading roughly 30% below their value in May 2024, the time of the IPO. The deal talk put its shares on course for their best trading day on record on Tuesday.

With scarce information beyond the confirmation of early talks, some analysts were puzzling over the deal's logic.

"We are surprised that the Puig family will relinquish independence and majority control," JPMorgan analysts said in a note, adding that the disclosed talks could also spark the appetite of other potential bidders.

The two companies have discussed a combination involving shares and cash, a person familiar with the matter said. The Puig family could share control of the entity with the Lauder family, although terms could still change, the person added.

Puig declined to comment on the deal details. Estee Lauder did not immediately respond to a request for comment.

ESTEE LAUDER IN THE MIDST OF A TURNAROUND

Some analysts say the planned deal could be a distraction for Estee Lauder which is trying to reinvent itself after years of sluggish sales as U.S. shoppers remain cautious on spending and turn to buzzy niche brands to splash out.

"Estee is in the middle of a multi-year turnaround, which requires management to focus on brand investments, innovation and in-market execution after years of sales declines," Morningstar analyst Dan Su said in a note.

Estee Lauder's New York-listed shares were down about 8% at $73.25 in morning trading on Tuesday.

Analysts said the combined business, which would span brands like Estee Lauder's Clinique cosmetics and Puig's Rabanne fragrances, would have revenues of just over 20 billion euros, topping the 15.6 billion euros at L'Oreal's Luxe division, which sells products under brands like Armani and Yves Saint Laurent.

More than 70% of Puig's revenues come from perfume lines.

Xavier Brun, portfolio manager at Trea Asset Management in Barcelona, said the fact Puig owns its fragrance brands, rather than just licences, is an advantage.

"Carolina Herrera, Paco Rabanne and Jean Paul Gaultier are each close to a billion in sales, they're world-recognised, so you can leverage that, plus they bought Charlotte Tilbury which is expanding," Brun said.