Beauty products firm Coty (NASDAQ: COTY) and KKR (NYSE: KKR) have entered into a strategic transaction for Coty’s Professional and Retail Hair business. The transaction includes the Wella, Clairol, OPI and Good Hair Day brands. The deal values the businesses at $4.3 billion on a cash- and debt-free basis.

KKR will own 60% of this separately managed entity. Coty will own the remaining 40%. KKR is investing $1 billion directly into the firm through the issuance of convertible preferred shares.

Inside the Coty Deal

The transaction allows Coty management to focus on Prestige and Mass Beauty and develop increased cost competitiveness. By retaining a 40% stake in Wella, Coty’s shareholders can still benefit from the growth opportunities for Wella’s business and its long-term value creation. Coty will also be able to will reinvest in its power brands. These include Sally Hansen, Rimmel, CoverGirl, and Max Factor.

The company is targeting a net reduction in fixed costs of approximately $600 million in cash over the next 3 years. This equates to 25% of its pro forma fixed cost base. The one-off costs associated with this program come in around $500 million. These measures will drive strong financial improvement at Coty through FY23. The company expects adjusted operating margins in the mid-teens and leverage of below 4x.

KKR’s majority investment in Wella values the business at $4.3 billion on a cash- and debt-free basis. This equates to 12.3x FY19 adjusted EBITDA of $350 million on a fully-allocated basis. The deal includes approximately $160 million of central costs which will not transfer as part of the transaction.

The deal should close in the next six to nine months. The Wella business will likely issue approximately $1 billion of debt and distribute the proceeds to its respective shareholders. This will result in total net cash proceeds to Coty of approximately $2.5 billion.

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