Updated 4:38 p.m. ET May 22
Investors are making their thoughts known on the Lauder-Puig deal that is no more.
Puig’s stock dove, while the Estée Lauder Cos.’ shares rose after news broke late Thursday that their merger talks were over.
The Spanish fragrance and beauty company’s shares ended Friday down 13.4 percent at 15.27 euros. Lauder’s stock, meanwhile, closed up 11.9 percent to $88.32.
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As previously reported, the two companies late Thursday said they had ended discussions regarding a potential business combination, which would have made the merged group the largest prestige beauty player in the world. Puig and Lauder had first publicly confirmed they were in talks on March 23.
When the deal first came to light, it was Lauder’s stock that tumbled by around 10 percent, while Puig’s soared around 15 percent, insinuating that investors viewed the potential deal as more beneficial to Puig.
It is believed, according to industry sources, that negotiations with Charlotte Tilbury, which generates about 15 percent of Puig’s sales, was an important sticking point in negotiations.
But macro questions had been swirling since March about how the new merged company would be structured and whether a marriage between Lauder and Puig would make sense for either.
“Investor skepticism around a potential Puig transaction has centered on its scale, structural complexity and implications for portfolio strategy,” wrote Jefferies equity analyst Sydney Wagner in a note Thursday. “With [Estée Lauder] already executing a multiyear turnaround under its Beauty Reimagined initiative (aimed at restoring organic sales growth and expanding OM), incremental integration risk paired with a still-challenging macro backdrop (geopolitical risk, uneven regional demand) likely limited investor appetite for the deal’s risk/reward profile.”
Joël Palix, founder of boutique consultancy Palix Unlimited, had longstanding reservations on the culture fit of a Lauder-Puig merger.
“So maybe it’s a good thing that they’re not merging,” he said, adding the operation would have been highly complicated to undertake. “It’s better if they realize this now [rather] than later, and it’s too late. We know that a lot of mega mergers fail because of the complexity. And that was a real mega merger.”
Now that the deal has unraveled, eyes are also on the future.
Barclays on Friday published a note titled “What Now?” with a focus on Lauder. The bank’s analyst Lauren Lieberman had from the outset expressed surprise and confusion about the prospect of Lauder acquiring Puig, regarding the portfolio under consideration and the timing, since she felt there was progress underway with Lauder’s “Beauty Reimagined” strategy.
Lieberman outlined nine questions regarding the potential deal. They include: “Is there a financial and strategic rationale for having much greater scale both as a company and in fragrance specifically? If so, does not acquiring Puig make for a more challenged path ahead, perhaps with less capacity for reinvestment?” “Puig carries significantly higher margins than Estée Lauder. With greater P&L flexibility you would have had in a merger, where would you have incrementally invested?”
In a note published Friday, Jefferies also delved into what might come next.
“We have previously cited potential interest in [Estée Lauder] by its own suitors, including Unilever,” Jefferies equity analyst David Hayes wrote. “The Lauder family voting control demands support for any future partnership, but we could see pressure on the family to engage with third-party interest, if a willingness to partner was declared in the future.”
Deutsche Bank’s research analyst Steve Powers wrote in a note that it’s important the merger outcome does not preclude future activity for Lauder’s portfolio, “but it does suggest a likely recalibration in scope and timing.”
“[Estée Lauder] has long indicated a willingness to pursue smaller, more targeted acquisitions that can be more easily integrated into a streamlined operating model, and we suspect this will again take priority (with larger transactions now more contingent on more evolved performance against Beauty Reimagined and the ‘One ELC’ operating model),” he added.
On what this means for upcoming deals in the sector, one source said: “The M&A world will breathe a sigh of relief because this means that everybody is still active.”
That same source believes Puig will have more options going forward because it is smaller, despite the speculation over Charlotte Tilbury.
As previously reported, Tilbury’s contract negotiations were first reported by the Spanish economic and business publication Expansión earlier this week, which wrote that she was looking to renegotiate her contract with Puig on terms more favorable to her and potentially exit the company she founded before the pre-determined date of 2031.
Nevertheless, another source said: “Lauder feels really good about their future now, because they’ve had a good quarter.”
Indeed, its recent third-quarter organic sales grew by 2 percent, with a 10 percent gain in fragrance; adjusted earnings topped estimates, and the company offered an early forecast on fiscal 2027, projecting stronger growth.
Puig is also in a position of strength. It delivered record first-quarter sales for a solid start to this year. In the three months ended March 31, the company reported net sales of 1.22 billion euros, up 0.8 percent in reported terms and 4.7 percent on a like-for-like basis. The organic gains beat those of the premium beauty market in the period.