While Puig maintained its full-year guidance, it warned that the conflict in the Middle East was weighing on demand and would likely continue to do so through the next quarter. This warning is significant for Estée, which is banking on Puig's resilient margins and robust cash flow to help fuel its own recovery following a prolonged sales slump.
Estée is drawn to Puig's fashion-forward brands, such as Carolina Herrera and Charlotte Tilbury -- popular among TikTok influencers and affluent millennials -- viewing them as a means to better compete with French giant L'Oréal.
Estée is weighing a public tender offer for all of Puig's Class B shares at a price between 18 and 19 euros ($21-$22.20) per share, Reuters reported on Wednesday.
The new CEO, José Manuel Albesa, stated on Tuesday that merger talks were ongoing.
However, Puig generates a tenth of its sales in the travel retail sector, leaving it exposed to fluctuations in airport spending and international travel. Furthermore, Estée shareholders remain unconvinced that the merger will significantly narrow the gap with L'Oréal, particularly as Estée continues its restructuring and sales momentum remains fragile.
Estée has cut 7,000 jobs and streamlined its brand portfolio, yet its shares have slipped 1% since news of the merger talks broke on March 23.
Balance sheet pressure is adding to investor unease. Estée's net debt is nearly five times its annual EBITDA, limiting flexibility should this major acquisition fail to meet expectations. In contrast, L'Oréal's net debt stands at just 20% of EBITDA.
Estée is set to report its January-March results on Friday. Analysts polled by LSEG forecast a 3.9% increase in sales compared to the previous year, when revenue plummeted 10%, though growth is expected to slow relative to the prior quarter.
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L'Oréal has been widening its lead in the luxury beauty sector for years, bolstering a broad portfolio spanning skincare, makeup, and high-margin fragrances, including acquisitions such as Kering's perfume assets. Its Luxe division, which includes Lancôme, generated $18.3 billion in sales last year and accounted for more than a quarter of the group's profits.
Like Puig, L'Oréal has noted pressures related to the war, particularly in the United Arab Emirates, and anticipates a greater impact in the second quarter. Nevertheless, it posted its fastest quarterly sales growth in two years and expressed optimism regarding demand.
Estée has struggled to keep pace, weighed down by weak sales in China, its reliance on travel retail, and uneven demand for makeup. Even if combined, Estée and Puig would post sales of approximately $20.6 billion, far below L'Oréal's total annual revenue of $51.6 billion.
Still, a $40 billion merger would give Estée a fighting chance, potentially lifting Estée's margins to an estimated 15.6%, up from the current 13.8%.
'They have to preserve what makes each company great,' said TD Cowen analyst Oliver Chen, noting Estée's brand portfolio and Puig's strength in luxury fashion and fragrances.
(Reporting by Arriana McLymore in New York; editing by Sayantani Ghosh and Nick Zieminski; Spanish editing by Tomás Cobos)
