Kering sells beauty unit to L'Oreal for $4.7 billion

Source Credit : Reuters

Gucci owner Kering has agreed to sell its beauty business to L'Oreal for 4 billion euros ($4.66 billion), in a major shift in strategy by new CEO Luca de Meo as he moves to tackle the luxury group's high debt and refocus on its core fashion business.

Under the deal, French beauty giant L'Oreal will acquire Kering's fragrance line Creed, which former CEO Francois-Henri Pinault acquired in 2023 for 3.5 billion euros, as well as exclusive rights to develop fragrance and beauty products for 50 years under Kering's fashion labels including Bottega Veneta and Balenciaga.

L'Oreal will also get the Gucci licence, also for 50 years, once a deal with Coty , which analysts believe to last until 2028, expires.

"We believe selling Kering Beauté at around the same price paid for Creed two years ago is bitter but necessary medicine," said analysts at Bernstein.

While the idea of selling the beauty business had been identified as an option before de Meo officially took charge in September, the Italian dramatically accelerated discussions with L'Oreal this month, two sources familiar with the matter said.

Kering beauty will be L'Oreal's largest acquisition to date, bigger than its purchase of Australian brand Aesop for $2.5 billion in 2023. The deal makes sense strategically, Bernstein analysts said, with Creed one of the most exciting brands in the growing luxury fragrances area.

Shares in Kering jumped 4.7% while L’Oreal rose 1.4%.

SIGNIFICANT STEP TOWARD REDUCING DEBT

The sale is a significant step towards reducing Kering's net debt, which stood at 9.5 billion euros at the end of June, on top of 6 billion euros in long-term lease liabilities, sparking investor concern.

It is also a major shift in direction by De Meo less than two months after taking the helm, as he unwinds one of the biggest strategic pivots made by his predecessor Francois-Henri Pinault, whose family controls the group, in recent years.

Kering set up its beauty business in 2023 after acquiring perfume maker Creed to cut its reliance on star brand Gucci, which accounts for most of its profits.

But the French conglomerate has struggled to ramp up the beauty business. The division that comprises beauty operations reported a 60 million euro operating loss for the first half of the year.

Kering is also battling declining growth at its largest brand Gucci as demand in the key Chinese market slowed. Gucci's revenue plummeted 25% year-on-year in the last reported quarter, increasing the pressure on Kering to deleverage to avoid further credit downgrades.

De Meo, who took over as CEO in September, had told shareholders he planned to take some difficult decisions to reduce debt at the group, including rationalising and reorganising where necessary.

The company has also postponed a plan to fully acquire Italian fashion brand Valentino, and is aiming to sell stakes in its real estate to raise cash.