PARSIPPANY, NJ, May 12, 2020: In one of the most competitive M&A battles in professional beauty history, KKR came out the winner in the deal reached over the weekend for Coty Professional Beauty. The strategic partnership involves the sale of a 60% majority stake in Coty’s Professional Beauty and Retail Hair Business, including the Wella, Clairol, OPI, and ghd brands, at a contemplated enterprise value of $4.3 billion. Coty will retain the remaining 40% interest in the business, which is number two in the salon hair care industry behind world leader L’Oréal, along with OPI professional nail care, the number one global professional nail care brand (based on Kline’s Salon Hair Care and Professional Nail Care global studies). KKR faced a formidable opponent in Henkel which, for the second time, was a top contender for this business; it lost out to Coty in 2015 when Procter & Gamble sold the business.
If a deal had been reached by the end of 2019, the outcome likely would have been different. With COVID-19 raging across the globe in earnest in early 2020, the professional beauty business has been among the hardest hit, with salon shutdowns bringing this high-touch service industry to a virtual halt. In the United States alone, Kline estimates that salon hair service revenues dropped by over $5 billion in Q1 alone (based on Kline’s Impact of COVID-19 on the Salon Hair Care Market). This has had a direct and immediate impact on Henkel, Coty, and many others, with industry revenues headed for a steep decline in 2020 and a long road ahead for recovery. However, with this bleak outlook, the dynamics of the Coty Professional Beauty deal shifted, giving the upper hand to KKR, with Henkel’s position as a strategic buyer weakened due to the challenging current and future state of the salon industry.
While KKR will face challenges ahead with the Coty Professional Beauty business, Kline believes that the company will be able to adapt and focus its resources based on the changes in hair and nail salons, along with variations in consumer behavior. In Asia, which is further ahead in COVID-19 recovery, Coty is likely to make further inroads with its successful Wella colorants business in China, Japan, and South Korea. It is also advantaged in the U.S. market with its distribution strategy via Sally Beauty and position with independent stylists, as Kline expects more self-employed stylists in this new reality (source: Kline Independent Stylists: Global Market Brief beauty report). Kline also expects the OPI professional nail care brand to seek greater retail and online sell-through, as nail salon businesses are likely to suffer the greatest closure casualties in professional beauty.
Kline’s worst-case global forecast for professional beauty indicates the market will dip to $20 billion by 2024, contracting by approximately $5 billion from the $25 billion it registered in 2019. We thus expect KKR will retain its ownership of Coty Professional Beauty throughout this period, perhaps selling it to Henkel at some point in the future. The next 12 to 18 months are critical for world health and the economy, with the health of the professional beauty business tied to this recovery. Kline is modeling COVID-19 impact and recovery with monthly updates for the global salon hair care industry.
