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Post-IPO, Coty investors smelling like roses

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Coty, along with fragrances and cosmetics, also makes toiletries, including deodorant. Good thing. The investors who sold shares in the company's initial public offering – none of the proceeds will go to the company – must have been sweating profusely in the weeks leading up to the pricing on Wednesday night. The recent stock market rally has rolled over since May, after sending the shares of Coty competitors Estee Lauder and L'Oréal up by a fifth and a third, respectively, in just six months. If the euphoria had passed before Coty got to market, it would have been hard to mask the sour smell of missed opportunity.

The company ended up selling $1-billion (U.S.) of shares at $17.50 apiece. That makes it the third-largest U.S. IPO this year, according to Dealogic data. And the deal was done at a heady valuation: 22 times trailing earnings, even if, as the deal prospectus proposes, share based compensation expense and various one-time items are backed out. Put the share compensation back in and the P/E rises to 24 times. Yes, Estee Lauder and L'Oréal trade even higher, with P/Es of 26 times. Both of those companies have grown faster than Coty in recent quarters though. Coty, which did not increase revenues at all in the nine months ending in March, is suffering for its heavy exposure to weak European markets. Coty also brings with it a slight odour of mismanagement. In 2012 it took half a billion dollars in writedowns, due to fumbled 2010 acquisitions of the U.S. skin care brands Philosophy for $930-million and China's Tjoy for $400-million. Maybe it is lucky that Coty's halfhearted $13-billion bid for Avon never went through.

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The IPO price was the midpoint of the anticipated range and the shares traded slightly down when the market opened. So this was no blowout deal. So far in the second quarter, the number of IPOs pricing above-range has fallen, relative to both the first quarter and a year ago. The IPO market is far too lumpy to draw solid conclusions from this. But it is certain that the Coty deal, now that it is away, smells sweet to the sellers.

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