Keeping up with the Kar… crash deal?

Just a few weeks ago Kim Kardashian sold a 20% stake in her cosmetics company business to Coty for $200m (values the business at $1bn – quick maths). Coty’s stock price rallied 10% on the deal announcement and it has all the signs of being a complete slam dunk. 

With this deal Kim will hold 72% (Kris Jenner holds 8%), Coty holds 20% and Coty has an option to increase their stake. 

Here’s what Peter Harf, Coty Chairman and Chief Executive Officer had to say “Kim is a true modern day global icon. She is a visionary, an entrepreneur, a mother, a philanthropist, and through social media has an unparalleled ability to connect with people around the world. This influence, combined with Coty’s leadership and deep expertise in prestige beauty will allow us to achieve the full potential of her brands.”

It just so happens Peter Harf is good friends with Kris Jenner. To really put this deal into perspective you have to move beyond skin deep & into the ugly side of the beauty business. Let’s rewind to November 2019. 

The Coty/ Kylie cosmetics deal

In late 2019 Coty bought 51% of Kylie Cosmetics for $600m implying the entire company was valued at $1.2bn. The Jenners claimed 2017 revenues were $330m. So it looks like Coty were paying roughly 3.5x sales for Kylie Cosmetics (that’s actually reasonable)… but they weren’t!

To give you an idea on the valuation of cosmetics companies, paying anywhere between 3x- 4x of top-line (revenue) is considered normal.

L’Occitane (French beauty and personal care company) bought Elemis & paid 6.4x. If you’re thinking “wow, they overpaid” – you’re absolutely right! Here’s what analysts said:

So Coty cough up $600m for Kylie Cosmetics. Coty stock went up roughly 5%. It’s not often that happens. In M&A deals the buyers stock price usually goes down and the sellers stock price goes up. This reflects the fact most buyer’s overpay. So here, the market is like “YAY”, this is actually a decent deal.

So everyone is thinking “okay, this is a $300m business” but on a conference call with analysts the CFO says “uhm guys, Kylie cosmetics made $177m in the last 12 months & $125m in 2018”

Investors just realized Coty paid 7x- 9x revenue! (This is like expecting a 6’4 guy on a blind date, but he’s 5’4)

On these deals, both the buyer and seller have dealmakers to advise them. They’re usually expensive . If you’re Coty closing a billion dollar deal, who do you hire? A globally renowned investment bank with a long list of deal credentials?

They hired Tiger Chark

No, seriously – that’s their name.

They have 5 employees. CODE RED!

Here’s Tiger Chark’s site which looks like something out of a “wanderlust” Instagram post & much less like an investment bank.

As a buy-side advisor you’re expected to know EVERYTHING. It’s why you’re paid obscene amounts to advise companies.  Your job is to find every little detail to chisel away at the price through analyzing the company. It’s called “due diligence”.

You get an army of accountants, lawyers & experts to meticulously undress this company. It’s CSI.

To give you an idea of the level of meticulous planning that goes into winning a deal, let’s look at one of Uber’s advisors. Morgan Stanley’s top technology investment banker, Michael Grimes knew Uber was huge and one day they would list on the stock market. He wanted a role on the IPO badly so he drove an Uber for YEARS. His banking salary was a few million.

Did Tiger Chark do a proper due diligence? Was Coty reckless? When did people know this was a screw up? On Day 1 analysts were sounding alarm bells. Some analysts drink the cool-aid. Investment bankers love people who don’t question anything. It’s easy to gloss over important details and really makes the deal look good.

As the deal started unraveling people began to realize, “hold on just a minute we based Kylie’s net worth on revenue numbers of $330m, this business is nowhere near that!”

Then it clicked!

Kylie is not a billionaire, sure she’s rich enough to cry in cashmere. To Kylie’s defense – the Forbes rich list has always been a contest of massive egos and guesstimates. Her story isn’t surprising considering Donald Trump actually lied his way onto the Forbes list. From 1985-1994 he had $1.2bn of losses on his tax filings yet appeared on the list 5 times! Forbes claimed Kris Jenner showed them forged tax returns when they were ascertaining Kylie’s wealth.  Kris Jenner vehemently denies this.

Coty’s stock price is down 60% since the day they acquired Kylie cosmetics. Definitely no long-lasting shine on this deal. Before we squarely blame poor deal making on the tanking stock price – worth noting Revlon is down 70% over the same period.

Are Coty notorious for doing value erosive deals? Short answer – yes

Coty has changed executive management four times in the last five years and have had a string of failed turnaround plans.

Fast-forward to today

“This time is different” which resembles the words of every cheating ex on the planet. The Coty/ KKW deal is already off to a rocky start – legal action. What do Kim & Kylie have in common? They use the same manufacturing company. This is where it all ties together.

Seed Beauty (the manufacturer) have accused Coty of trying to steal trade secrets when it bought Kylie’s business and now that Kim is involved in a Coy deal – Seed Beauty has decided they need legal counsel.

Here’s an excerpt of their court filing:

“Out of deep respect for Kylie Jenner, Kim Kardashian, and the highly successful businesses Seed created with them, Seed attempted to resolve this dispute privately and repeatedly asked for assurances related to leakage of Seed proprietary information from King Kylie to Coty,”

At one point it reads like a spy novel

“Coty and King Kylie consistently refused to provide any assurances,” … “really was a subterfuge to learn Seed’s confidential business methodologies.”

… and here’s the final bombshell where they use the “theft” word

“This action is to stop Coty’s theft of Seed’s pioneering and proprietary digital-first business model that has revolutionized the cosmetics industry,”

This will play out over the next couple of months and needless to say it adds yet another level of complexity to the string of messy Coty deals across the last 5 years (including the last two with the Kardashian sisters).

Guess who was the advisor to Coty on the Kim Kardashian deal?

Yes – it was Tiger Chark

Latest posts by Koshiek Karan (see all)
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4 months ago

Man, you are good. You remind me of Bloomberg’s Matt Levine. Thumps up. I guess there’s something that spurs you guys in M&A.

4 months ago

HOW did Tiger Chark get ANOTHER deal after such a miss on the first?🙆🏿‍♂️

4 months ago

Who knew…!
Insightful stuff right here.

Khotso Mohlala
Khotso Mohlala
4 months ago

My goodness, WHAT A GREAT READ. This just opened my eyes

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