CINCINNATI - It isn’t every day that a billion-dollar discount goes unnoticed by Wall Street. But that’s exactly what happened this week, when Procter & Gamble Co. closed its sale of 41 brands to Coty Inc. at a price tag of $11.4 billion.
That’s $1.1 billion less than P&G said the deal was worth in a 2015 press release announcing the sale.
“If they were selling it for cash, it would be another story,” said Vic Lassandro, director of equity research and senior portfolio manager at Riverpoint Capital Management Downtown.
But Lassandro said P&G did such a skillful job of closing the sale of CoverGirl, Max Factor and dozens of other beauty brands that no one called out the 9 percent difference in transaction value.
“It was something they wanted to get rid of anyway,” he said. “They eliminated a couple billion in debt, retired 5 percent of their shares. So, the billion’s probably not that big in the overall scheme of things.”
P&G structured the deal as a Reverse Morris Trust, which is a share swap designed to minimize the tax impact of a sale on the company and its shareholders.
P&G is experienced in its use of the structure. That’s how it sold its Jif peanut butter business in 2002 and Folger’s in 2008.
Washington Post columnist Allan Sloan estimated that P&G would avoid between $2 billion and $4 billion in tax payments with the deal, calling it "a thing of beauty to tax techies" and "bad public policy" for the rest of us.
"They probably saved far more in taxes than the billion-dollar swing amounts to," Lassandro added.
Because of the structure of these complicated deals, P&G has said from the beginning that the transaction value of the deal would fluctuate based on the relative difference between the share price of P&G and Coty.
And fluctuate it did. Within hours of the deal’s announcement, P&G estimated the transaction value had risen to $15 billion. A month before closing, the estimate was more than $13 billion.
What ultimately caused the $1.1 billion decline in value was a “discount factor” that P&G applied to the deal about a month before closing.
P&G needed to make sure that its shareholders would be willing to trade their stock for Coty shares. So, on Sept. 1, it announced P&G shareholders would receive up to $1.075 of shares in Coty for every dollar of P&G shares tendered. Lassandro said the offer all but guaranteed a return for those who tendered shares.
“You’d almost have to pay someone” to trade P&G for Coty stock, Lassandro said. Without the discount, “I don’t think anyone in their right mind would do it.”
Hedge funds and arbitrage specialists – investors who look for profits in small discrepancies in stock price – started buying P&G shares and selling Coty stock short. By the time the deal closed, P&G hit a 52-week high of $90, while Coty shares fell to $23.09.
The end result: P&G had 6.6 times as many shares as it needed to complete the offering. And the company accomplished its goal of simplifying its operating structure by ridding itself of smaller brands with limited growth potential.
Lassandro estimates the shareholders who participated in the deal got a return of about 2 percent if they sold their Coty shares when the entire transaction was finalized.
The closing value of $11.4 billion wasn't the only thing that changed from beginning to end. P&G carved out two perfume brands from the sale because licensors for Christina Aguilera and Dolce & Gabbana refused to provide their consent. P&G eventually found other buyers for the products. In addition, P&G retained ownership of its Vidal Sassoon brands – opting instead to provide a perpetual, royalty-free license that gives Coty operating control but not ownership.
One potential downside is yet to be revealed by P&G. Chief Financial Officer Jon Moeller said 15 months ago that P&G’s one-time gain on the sale “will be dependent on the final deal valuation.”
And that’s $1.1 billion smaller, now that the deal is done.
P&G spokesman Damon Jones said the gain won’t be disclosed until the company reports first-quarter earnings on Oct. 25, but it will be within the range first estimated by the company on the day the Coty sale was disclosed. That’s between $5 billion and $7 billion, he said.
