Coty (NYSE: COTY) reported Q3 EPS of ($0.08), $0.07 worse than the analyst estimate of ($0.01). Revenue for the quarter came in at $1.53 billion versus the consensus estimate of $1.53 billion.

Medium Term Outlook

Assuming the successful completion of the KKR partnership, Coty’s expanded $700 million fixed cost reduction program will make the Company more competitive. Coty continues to target operating margins in the mid-teens by FY23.

Strategic Transaction with KKR

Effective immediately, Coty has agreed to issue $750 million of convertible preference shares and KKR is fully subscribing to the issue. These shares will carry a coupon of 9% and will be convertible into Coty shares at $6.24, equating to a 20% premium to Coty’s closing stock price on May 8, 2020 of $5.20. KKR will be entitled to two seats on Coty’s Board of Directors following the completion of the transaction.

Simultaneously, Coty and KKR have signed an MOU and are engaged in exclusive talks to form a partnership for Wella at an enterprise value of $4.3 billion, in which KKR is expected to own 60 percent and Coty 40 percent, subject only to completion of limited confirmatory due diligence and execution of definitive documentation. Upon signing of the Wella transaction, Coty will issue $250 million of additional convertible preference shares to KKR with the same coupon and strike price provisions as the first $750 million tranche, resulting in incremental total proceeds of $3.3 billion. KKR is making its investment primarily from its flagship North American and European private equity funds, Americas Fund XII and European Fund V.

AFW LP and Credit Suisse are serving as financial advisors to Coty, and Skadden, Arps, Slate, Meagher & Flom LLP are serving as legal counsel to Coty.

For earnings history and earnings-related data on Coty (COTY) click here.