Coty, which has a market value of $9 billion and is majority owned by German conglomerate JAB Holdings, kicked off the auction process for its Professional Beauty unit in February with bids due the first week of March with expectations of completing the process by summer 2020, but the auction process has hit a snag. The portfolio was valued around $8 billion earlier this year before the coronavirus required the shutdown of salons.

The details we knew in March:

• Henkel AG and buyout firm KKR & Co. were among a small group that made it to the second round of bidding.
• Advent International and a separate consortium of Civen and the Abu Dhabi Investment Authority weren’t chosen to advance to the next round after initial offers were submitted.
• Private equity firms Bain Capital and Clayton Dubilier & Rice dropped out of the auction process.
• Some suitors made bids for just the Good Hair Day business or Coty’s Brazilian operations.
• Unilever and cosmetics maker Boticário Group were looking at parts of the business.
• Coty’s banks were offering financing to help buyout firms fund the acquisition.
• A representative for Coty said the strategic review of its Professional Beauty business and Brazilian operations was “proceeding as planned.”

Fast-forward to May – sources told Reuters :

• Henkel and US buyout fund KKR are holding off bidding because of concern over the fallout of the coronavirus pandemic.
• Hair salons and nail bars remain shut in most countries around the world and prospective bidders want to assess the impact of the shutdown on Coty’s brands, which include Wella, Clairol, GHD, and OPI nail polish, they said.
• Henkel is only targeting specific brands including hair specialist Wella, not the entire portfolio, but would not commit to a bid until it has more visibility on the industry downturn.
• KKR, the other bidder left in the process, was initially looking to snap up the entire unit and bet on its turnaround, but has now taken a cautious approach and wants to review Coty’s portfolio at a later stage when the fallout of the pandemic will be fully reflected on the balance sheet.
• Bidders have asked to update their due diligence because they cannot rely on pre-crisis revenue estimates.
• Securing financing for the deal has also become more difficult and Coty would take a hit on price if it refused to grant more time to both Henkel and KKR.
• Analysts have estimated the Professional division could sell for around $8 billion, but industry sources have said to WWD they anticipate valuations broadly will decrease as a result of COVID-19.

Wells Fargo analyst Joe Lachky put out a report saying the “halt of sale” of Coty’s Professional Beauty segment was “not a surprise.”

“Coty had originally targeted a deal to be announced by this summer, but we had thought a push-back in timing was likely,” Lachky wrote. “It appears the bidders want to assess the impact of the COVID-19 related industry shutdown of various distribution channels (especially the salon channel) before committing to a deal. We had also thought the environment could force Coty to execute the sale in multiple smaller transactions versus one large divestiture…. It’s too early to tell whether the transaction is simply delayed or will ultimately be completely called off.”

To avoid a fire sale, Coty’s CEO Pierre Laubies will need to give up on his plan to slash debt, which envisaged bringing the company’s net debt to EBITDA ratio down from 5.3 times to an estimated 3 times, Wells Fargo analysts said in a note issued after Reuters first reported on the deal stalling.