Background on Kering and L’Oréal
Kering, the owner of luxury fashion brands such as Gucci and Balenciaga, announced on Sunday that it has agreed to sell its beauty business to L’Oréal, the French cosmetics giant, for €4 billion (approximately $4.66 billion). This significant strategic move by new CEO Luca de Meo aims to tackle the high debt of Kering’s luxury group and refocus on its core fashion business.
Key Aspects of the Agreement
Under this agreement, L’Oréal will acquire Kering’s fragrance line, Creed, along with the rights to develop fragrances and beauty products under Kering’s fashion brands Gucci, Bottega Veneta, and Balenciaga through an exclusive 50-year license. Currently, Gucci’s fragrance license is held by Coty, and the new 50-year agreement with L’Oréal will commence once Coty’s license expires, reportedly in 2028.
Debt Reduction and Strategic Shift
The sale is a crucial step toward reducing Kering’s net debt, which stood at €9.5 billion by the end of June, including €0 million in long-term lease liabilities. This has raised concerns among investors, prompting the strategic shift under de Meo’s leadership. Less than two months into his tenure, de Meo is reversing one of the largest strategic pivots made by his predecessor, François-Henri Pinault, whose family controls Kering.
Kering established its beauty business in 2023 by acquiring perfume manufacturer Creed for €3.5 billion, part of an effort to diversify and reduce its reliance on the Gucci brand, which generates most of its profits. However, Kering has struggled to grow this business and reported a €60 million operating loss in the first half of the year.
Moreover, Kering faces challenges due to declining growth in its most important brand, Gucci, heavily impacted by slowing demand in the vital Chinese market. Gucci’s revenue plummeted 25% year-over-year in the last quarter, intensifying pressure on Kering to deleverage and avoid further credit rating downgrades.
Analyst Perspectives
Bernstein analysts stated, “We believe selling Kering Beauty at the same price as Creed two years ago is a bitter but necessary pill.” They added, “RBC analysts before the deal said it would be ‘less capital-intensive, less operations-focused, and potentially with higher margins,’ despite sharing revenues with L’Oréal.”
“We also believe this indicates a strategic refocusing on ‘soft luxury’ competencies, and any divestment from beauty could free up investment margins towards these priorities,” they wrote in a note to investors.
De Meo’s Plan and Future Moves
De Meo, who became CEO in September, had informed shareholders of his intention to make difficult decisions to reduce the group’s debt, including rationalizing and reorganizing when necessary. Kering has also postponed a plan to acquire the entire Italian fashion brand Valentino and intends to sell stakes in its real estate properties for cash.
L’Oréal’s Existing Relationship with Kering
L’Oréal, the world’s leading cosmetics and beauty company, already produces successful perfumes under the Yves Saint Laurent brand after acquiring the rights to the brand from Kering for $1.15 billion in 2008. The two companies have also announced the creation of a joint venture to offer luxury customer experiences and services.
Key Questions and Answers
- What is Kering selling to L’Oréal? Kering is selling its beauty business, including the fragrance line Creed and rights to develop fragrances and beauty products under Gucci, Bottega Veneta, and Balenciaga brands.
- Why is Kering making this sale? The primary reasons are to reduce the high debt of Kering’s luxury group and refocus on its core fashion business.
- When will the new agreement with L’Oréal take effect? The 50-year license agreement will commence when Coty’s current license for Gucci fragrances expires, reportedly in 2028.
- How will this sale impact Kering’s operations? Analysts believe it will make Kering’s business less capital-intensive, less operations-focused, and potentially with higher margins.
- What is L’Oréal’s relationship with Kering? L’Oréal already produces perfumes under the Yves Saint Laurent brand and has a joint venture with Kering to offer luxury customer experiences and services.
