In the week since Coty announced the proposed deal, its share price initially rallied, but then began to fall from a high of $23.55 last Wednesday to a low of $22.55 in early trading on Monday morning.
Some analysts and industry experts have expressed concerns that the company is expanding too fast and diversifying into areas where its decision-making executives have limited experience.
Acquisition is a bargain, but is it strategic?
The deal does take advantage of a weak currency in Great Britain, which means that dipping into Coty’s US dollar reserves to make the purchase represents a better deal, but that does not detract from the concerns that the company may have taken on more than it can cope with.
“It does add another element to an increasingly full plate for management to handle right now,” said Jason Gere, an analyst at KeyBanc Capital Markets Inc in an interview with Bloomberg.
However, some areas of the investment world are seeing the move in a more positive light for ghd, especially as the investment could open up its distribution channels and the prospect of further expansion.
Moody's moves to upgrade ghd
At the end of last week Moody's Investors Service placed the B3 Corporate Family Rating ("CFR") and B3-PD probability of default rating ("PDR") for ghd on review for upgrade.
“Moody's views the outlined transaction as positive for ghd. The new parent's large scale and worldwide leading position in the professional hair category are expected to support significant growth opportunities and address ghd's niche positioning and limited geographic diversification through Coty's channel and categories capabilities,” the company stated in an investor’s note.
“Moody's also believes that the proposed acquisition will alleviate ghd's limited liquidity headroom, given Coty's stronger liquidity profile supported by positive and recurring free cash flow generation.”
How the deal will work
Coty paid £420 of its own cash reserves and available debt facilities and the deal is expect to add to revenues as soon as it is closed.
Started by three British hairdressers, ghd has grown to become one of the biggest global players in the hair straightening and appliance category, a competitive area that has seen massive growth in the last few years.
The company generate a revenue of £178 million in 2015 from markets such as the UK, Australia, France, Germany, and the U.S, so the cash offer is in line with many similar acquisitions in the beauty space, whereby high-growth players are being sold for approximately three times their annual revenue.
Coty makes its mark as a major multinational
Coty has more than doubled in size in the last few years, as a result of a rash of significant investments that have seen it acquire a number of new businesses.
In February of this year, the EC approved the company’s biggest acquisition to date, which saw it take on 43 of Procter & Gamble’s fragrance, colour cosmetics and hair care brands in a deal estimated to have been worth over &12 billion.
The transaction has seen Coty take steps into uncharted territory, with an exposure to the hair styling world with P&G’s hair colour business, led by Wella and Clairol as well as exposure in previously unchartered geographies.