Estée Lauder loses 5.22 billion dollars on stock market after confirming Puig negotiations

Madrid – In Spain, investors, the market and analysts have enthusiastically welcomed the talks between Puig and The Estée Lauder Companies for a potential merger agreement. A decidedly opposite sentiment is being felt on the other side of the Atlantic, where the US beauty multinational's shares recorded another session in the red on March 24.

On Tuesday, after both companies confirmed on Monday evening, Madrid time, that they were in negotiations to discuss a potential merger of their respective business models, FashionUnited highlighted how Puig's shares were soaring in value. This followed a 7.71 percent drop in The Estée Lauder's shares the previous day, once the talks were confirmed. These opposing performances revealed the unequal valuation of the potential merger from the perspective of investors in each listed company. The disparity was further amplified after the opening of the New York Stock Exchange, where The Estée Lauder's shares are traded. On that exchange, the US beauty multinational's shares deepened their Monday decline, with a fall on Tuesday that eventually settled at -9.85 percent of their trading value, dropping from 79.29 to 71.48 dollars, compared to the already lower value recorded on Monday.

With this second consecutive fall in its share value following the confirmation of its talks with Puig, The Estée Lauder's shares have gone from trading at 85.92 dollars at the close of last Friday, March 20, to 71.48 dollars at the close of trading this Tuesday, March 24. This represents a 16.80 percent drop, which has naturally affected the company's market value. The company has lost 5.22 billion dollars in market capitalisation in just the last two days, falling from 31.08 billion dollars on Friday to 25.86 billion dollars at the close of trading on Tuesday.

Merger with “risks” and “challenges”

The exact causes for this sustained fall in The Estée Lauder's share value are not clear, nor can they be attributed to a single factor. It is clear, however, that they are a direct result of the negotiations with Puig. Secondly, they show a lack of support and significant doubts about the deal from the market and The Estée Lauder's shareholders. This is despite many analysts recognising the value for The Estée Lauder of a “strategic” move that would strengthen it against its main competitor, L’Oréal. At the same time, they also warn of the complexities this operation could entail and its potential risks, due to the size and nature of both companies, and in terms of reinforcing the US company's market position against the French group.

While both companies remain specialised in the beauty sector, “there are notable differences in the sales frequency of their products,” analyses Dan Coatsworth of the British investment platform AJ Bell. “Estée Lauder focuses on skincare, makeup and hair care, products that are purchased more frequently than the designer clothing offered by Puig,” leaving fragrances and perfumes as the “key area” and “where there is a clear overlap between the two companies.” From this perspective, “it could be argued that the activities of both companies are complementary, but a business merger would entail execution risks and very likely cultural differences” at a corporate level. “Estée Lauder has lost ground in recent years and needs a radical change to regain its leadership position,” and “the acquisition of Puig is an interesting proposal, but history suggests that the merger of two companies does not guarantee success.”

“If it goes ahead, a merger with Puig would raise Estée's market share in the luxury fragrance sector from 6 to 15 percent (according to Euromonitor), second only to L’Oréal's 16 percent,” notes Dan Su of US financial analysis firm Morningstar. “We see challenges arising from the size of the deal and its potential to distract Estée's management during a restructuring phase.” Su continues, “We are sceptical that Estée's management can carry out a merger of this magnitude in a way that creates value for shareholders.” The company “is in the midst of a multi-year restructuring process, which requires management to focus on brand investments, innovation and market execution after three years of declining sales.” Su adds, “we doubt that management can execute this plan efficiently while integrating Puig.” If the deal were to proceed, “we foresee some efficiency improvements in fragrance manufacturing, but we expect little margin improvement in Estée's core skincare business (half of sales), given Puig's low sales figure (600 million dollars) in this category.” To complete it, “it may have to issue up to 6 billion dollars in new shares to finance the deal, which would likely put the shares under further pressure.”

Positioned by analysts as the cornerstone around which this deal seems to revolve, “the agreement would further tilt Estée Lauder's portfolio towards fragrances, a sector with strong growth,” points out Sydney Wagner, an analyst at Jefferies, in a note reported by Reuters. However, in this sector, “competition from independent brands is intensifying, L'Oréal is redoubling its efforts” following the purchase of Kering's beauty division, and it is a category in which “the momentum” for growth “appears to be in an advanced stage”—meaning it is heading towards lower growth indicators. This warning, or rather warnings when added to the previous ones, is completed by reports pointing to the premium on Puig's share value and/or the significant stake in Estée Lauder that the Puig family would aim to achieve from these negotiations, for a merger that would be carried out through a share swap with a cash payment component.

These aspirations—a considerable premium and an equally significant stake in Estée Lauder's capital—are also putting downward pressure on The Estée Lauder's shares. Meanwhile, J.P. Morgan analysts told The Wall Street Journal, “it is surprising that the Puig family would give up independence and majority control of the 112-year-old group, even if they retain their economic stake, considering their recent market entry.” They concluded, “This fact is intriguing given the recent management changes,” focusing their words on the significant issue of the Puig family's legacy. This is one of the bargaining chips its members would have in these negotiations, from which, once open to selling or merging the group, they could pressure Estée Lauder by considering other offers.

This article was translated to English using an AI tool.

FashionUnited uses AI language tools to speed up translating (news) articles and proofread the translations to improve the end result. This saves our human journalists time they can spend doing research and writing original articles. Articles translated with the help of AI are checked and edited by a human desk editor prior to going online. If you have questions or comments about this process email us at info@fashionunited.com