Kering Sells Beauty Business to L’Oréal. Everyone but This Company Wins.

L’Oréal’s Paris-listed shares rose 1.2%. (Marlene Awaad/Bloomberg)

Key Points

• Kering is selling its beauty business, including House of Creed and licenses for Bottega Veneta and Balenciaga, to L’Oréal for €4 billion.
• L’Oréal will gain the Gucci fragrance license starting in 2028, expanding its prestige beauty portfolio and strategic depth.
• Coty’s loss of the profitable Gucci license potentially reduces its 2028 annual earnings per share by 11%.

Kering is making a clean break from the beauty business, selling its portfolio to L’Oréal for €4 billion ($4.7 billion).

The deal seems like a win-win for both parties, strengthening Kering’s strained balance sheet while expanding L’Oréal’s prestige beauty assortment. But there is one brand that won’t benefit from the new arrangement—Coty, which stands to lose the profitable Gucci license.

The agreement, announced Sunday, gives Kering the right to sell its beauty business to L’Oréal, including perfume brand House of Creed. It also includes the rights for L’Oréal to enter into a 50-year exclusive license to make and distribute fragrance and beauty products for Bottega Veneta and Balenciaga as soon as the deal closes, and to make products for Gucci starting in 2028, when Gucci’s current license with Coty expires.

For Kering, the deal is an opportunity to strengthen the company’s balance sheet, which has been significantly burdened in recent quarters, wrote Morningstar analyst Jelena Sokolova. It will also help management focus on improving the company’s main business, which is luxury fashion and leather brands, Sokolova added, noting that most luxury brands run their beauty business through licenses to large cosmetics groups that have more access to research and development.

“Although we believe Kering, with its size, could have developed a successful in-house beauty business over time (its success in eyewear is an example)—scaling it would take substantial time and resources, which, in our view, in the current environment could be better allocated elsewhere (that is, a recovery in the desirability of its main brands),” she wrote.

On L’Oréal’s side, the acquisition adds an extra layer of longer-term strategic depth to the stock’s story, wrote Cedric Besnard, an analyst at Citi. Both the Creed and Gucci fragrance brands are premium enough to be part of L’Oréal’s broader prestige category and have runway to keep growing.

What is more, given L’Oréal’s strong cash position, the company still has ample room for any other growth initiatives even after completing the transaction, Besnard added.

Yet while the licensing deals are set to sharpen L’Oréal’s competitive edge and solidify its leading position in the fragrances category, it is a painful blow for Coty, which currently holds the license for Gucci products. The loss is a significant negative for Coty, wrote Olivia Tong, an analyst at Raymond James. Gucci’s Flora and Bloom franchises have been boons to Coty, and losing the brand altogether creates a gap in the company’s prestige lineup, Tong added.

Citi analyst Filippo Falorni agrees, estimating that the loss of the Gucci license could dent Coty’s annual earnings per share in 2028 by about 11%, assuming that Gucci represents about 9% of Coty’s total annual sales. These figures could shrink if the company adds other licenses to its portfolio in the coming years, which Falorni says is likely.

Coty stock still took a bit of a beating, down 4.8% on Monday, whereas Kering and L’Oréal’s Paris-listed shares rose 4.8% and 1.2%, respectively.

Write to Sabrina Escobar at sabrina.escobar@barrons.com