Consumer product giant Proctor & Gamble (P&G) agreed to sell its portfolio of 43 beauty brands to beauty products maker Coty Inc. (Coty) for $12.5 billion on July 8, 2015. Included in the deal are professional salon and retail hair products like Nice & Easy and VS Salonist, as well as cosmetics and fine fragrances from Gucci and Dolce & Gabbana. The deal is part of P&G’s strategy to shed more than 100 brands and focus on 10 core product lines, like Tide, that tend to grow faster than the beauty brands.

Coty, owned by European firm JAB Cosmetis B. V., sells fragrances, skin products and cosmetics from brands including Calvin Klein, Marc Jacobs and Chloe. This transaction creates one of the world’s largest beauty products companies. Coty hopes its global marketing and distribution network and widely recognized brand will reinvigorate growth for many of the beauty products acquired from P&G.

The deal was structured as a reverse Morris Trust in which P&G created a separate subsidiary spun off to its shareholders through a split-off to become a public company and subsequently merged with Coty Cosmetics. P&G shareholders post deal will own 52% of the combined company with Coty’s current shareholders owning the remainder. The new firm will have $10 billion in annual revenue. Under the Reverse Morris Trust split off, P&G shareholders could elect to participate in an offer to exchange P&G common shares they hold for common shares of a newly created subsidiary. The company’s shareholders would have the option of exchanging all, some or none of their shares. Any shares not exchanged through the split-off exchange offer were transferred to P&G’s current shareholders on a pro rata basis through a spin-off.

Neither the split-off nor the spin-off creates an immediate tax liability for the firm’s shareholders, as any taxes owed would be deferred until shareholders sold their shares in the newly created subsidiary. The new entity created by the split off is immediately merged with a new wholly-owned merger subsidiary created by Coty. The Reverse Morris Trust acquisition combines a divisive reorganization (e.g., a spin-off or split-off) with an acquisitive reorganization (e.g., a statutory merger) to allow a tax-free transfer of a subsidiary under US law. The use of a divisive reorganization results in the creation of a public company which is subsequently merged into a shell subsidiary of another firm, with the shell surviving.....

Discussion Questions:

1. The merger of Coty and the P&G subsidiary RMT Brands could have been achieved as a result of a P&G spin-off of RMT Brands. Explain the details of how this might have happened.
2. Speculate as to why P&G chose to split-off rather than spin-off RMT Brands as part its plan to merge RMT Brands with Coty. Be specific.
3. What are the Morris Trust tax regulations? How did they affect how this deal was structured?
4. How is value created for the P&G and Coty shareholders in this type of transaction?
5. Why is the percentage distribution of ownership in the newly created firm following closing important in a Reverse Morris Trust transaction?
6. What was the purpose of the collar arrangement used in this deal? How could it protect both P&G and Coty shareholders?