The owner of gucciKering, announced on Sunday that it has agreed to the sale of its beauty business to L’Oréal for 4 billion euros ($4.66 billion), a major change in strategy by new CEO Luca de Meo to address the luxury group’s high debt and refocus on its core fashion business.
Under the deal, French beauty giant L’Oréal will acquire Kering’s fragrance line, Creed, as well as the rights to develop fragrances and beauty products under the group’s fashion brands Gucci, Bottega Veneta and Balenciagaunder a 50-year exclusive license.
The license to Gucci fragrances is currently held by Coty and the new 50-year agreement with L’Oréal will begin when it expires, according to analysts in 2028.
The sale is a significant step towards reducing Kering’s net debt, which stood at 9.5 billion euros at the end of June, in addition to 1 billion euros in long-term lease liabilities, which has raised investor concerns.
It also marks a major change of course for De Meo less than two months after taking the helm, as it undoes one of the biggest strategic pivots made by his predecessor, François-Henri Pinault, whose family controls the group, in recent years.
Kering created its beauty business in 2023, after acquiring perfume maker Creed for €3.5 billion, part of an effort to diversify and reduce its dependence on its Gucci brand, which represents the majority of its profits. However, the group has had difficulties in boosting the business and has recorded an operating loss of 60 million euros in the first half of the year.
The company is also battling slowing growth at its biggest brand, Gucci, which has been hit hard by slowing demand in the important Chinese market. Gucci’s revenue plummeted 25% year-on-year in the final quarter, increasing pressure on Kering to deleverage and avoid further credit rating downgrades.
“We believe that selling Kering Beauté at the same price paid for Creed two years ago is a bitter pill to swallow, but necessary,” say Bernstein analysts.
Returning to beauty licensing would be “less capital intensive, less operations-oriented and possibly higher margin,” RBC analysts said ahead of the deal, even though it would have to share revenue with L’Oréal.
“We also believe it signals a strategic refocusing towards its core competencies in ‘soft luxury’ and any divestment from beauty may free up investment headroom towards these priorities,” they wrote in a note to investors.
De Meo, who took over as chief executive in September, had told shareholders he planned to take some tough decisions to reduce the group’s debt, including streamlining and reorganizing where necessary.
The company has also postponed a plan to acquire the entire Italian fashion brand Valentino and intends to sell stakes in its real estate holdings to raise cash.
L’Oréal, the world’s largest cosmetics and beauty company, already produces highly successful perfumes under the Yves Saint Laurent brand after acquiring the rights to the brand from Kering for €1.15 billion in 2008. The two companies have also announced the creation of a joint venture to offer experiences and services to luxury customers.
