Coty Sells Final Wella Stake to KKR for $750 Million, Aiming to Ease Leverage Burden

What happened

Coty has sold its remaining 25.8% stake in Wella to KKR, receiving $750 million in upfront cash and a 45% share in future proceeds from any sale or IPO after KKR's preferred return. This transaction occurs against a backdrop of high financial risk, as highlighted in the DeepValue report, with Coty's net debt/EBITDA at 4.2x and interest coverage barely above 1x following a FY25 net loss. The cash influx directly targets the company's elevated leverage, a critical watch item for investors, though it sacrifices ongoing earnings from Wella. By divesting this non-core asset, Coty continues its portfolio rationalization, which includes a strategic review of the structurally loss-making Consumer Beauty segment. However, the deal alone does not address broader execution challenges, such as revenue declines and tariff headwinds, keeping the turnaround speculative.

Implication

Investors should see this divestiture as a positive step toward deleveraging, offering $750 million to lower net debt and potentially improve key ratios like interest coverage. Yet, the loss of Wella's income stream could pressure future earnings, especially if the Consumer Beauty segment remains unprofitable and prestige fragrance growth stalls. The 45% participation in future Wella proceeds provides some upside potential, but it is contingent on KKR's actions and Wella's performance, adding uncertainty. This move aligns with management's focus on simplifying the portfolio, yet it does not guarantee sustained revenue growth or margin improvement amid ongoing tariff and competitive risks. Ultimately, while the transaction eases near-term financial strain, investors must monitor whether the cash is used effectively for debt reduction and if other strategic initiatives, like cost savings, materialize to support a more stable equity story.

Thesis delta

The sale partially addresses the balance sheet concerns flagged in the 'WAIT' stance by injecting liquidity to reduce leverage, a key monitor item. However, it does not resolve the underlying weaknesses in Consumer Beauty or ensure revenue stabilization, leaving the speculative turnaround thesis unchanged until evidence of broader execution and deleveraging progress emerges.