By Ashutosh Pandey
June 13 Shares of perfume and beauty products seller Coty Inc fell more than 3 percent in their market debut on Thursday, taking the gloss off the third-largest U.S. IPO this year.
There had been concerns ahead of the IPO that Coty was too dependent on the U.S. and European markets and that its mass-appeal products exposed it to swings in discretionary spending.
The company gets most of its revenue from perfume brands including Calvin Klein, Davidoff and Playboy as well as those it sells under the names of celebrities such as Beyonce Knowles, Lady Gaga and Jennifer Lopez.
Coty's sales were flat in the first three quarters of 2013, largely because of its lack of skin-care products, a market segment that is growing faster than fragrances.
The company's shares, which were priced at $17.50 on Wednesday, fell as much as 3.4 percent to $16.90 in morning trading on the New York Stock Exchange.
They were priced at the mid-point of the expected range, raising about $1 billion and valuing the New York-based company at about $6.70 billion.
"I hear the allocations to the retail side was very small ... As there was heavy institutional interest and it was filled so there were no after-market orders," said John Fitzgibbon, the founder of IPOscoop.com.
Coty, founded in 1904 by Francois Coty in Paris, filed to go public in June 2012 after dropping a $10.7 billion takeover bid for larger peer Avon Products Inc.
Apart from failing to capitalize on the recent surge in the demand for luxury beauty products, analysts said Coty has let rivals such as Avon and Estée Lauder Cos Inc beat it to fast-growing markets in Asia and Latin America.
While Coty has made a number of deals in recent years to expand into overseas markets such as China and bolster its skin-care offerings, its chief executive told Reuters that dealmaking was not essential.
"We have enough tools to grow organically in all the segments," CEO Michele Scannavini said in an interview on Thursday.
"We do not need acquisitions to foster our growth," he said, adding that there were no plans for a "transformational" deal.
Coty did not receive any proceeds from the offering as all of the shares were sold by selling shareholders, including the billionaire Reimann family of Germany.
Joh A Benckiser GmbH, the investment vehicle for the Reimann family, sold about 76 percent of the Class A shares in the IPO for proceeds of $762 million.
The group will continue to hold 269.9 million Class B shares after the offering, giving it 85 percent of the total voting power in the company.
Minority owners Boston-based Berkshire Partners LLC and private equity firm Rhone Capital also sold about $119 million worth of shares each in the IPO, diluting their voting power in Coty to 6.4 percent, according to the company's IPO filing.
"It was a shareholder bailout on the IPO," said Francis Gaskins, a partner at IPO research company IPODesktop.com.
"The message they have sent to investors, therefore, is that they do not want to be accountable to investors, and investors do not like that attitude," he said.
According to Coty's dual class share structure, each Class B share is entitled to 10 votes while each Class A share has only a single vote. The Class B shares, retained by owners and early investors, were not offered to the public.
In its prospectus, Coty warned potential investors that because it would be a controlled company, it would not have to comply with some of the New York Stock Exchange's corporate governance requirements including one that calls for most directors to be independent.
The company went public at a time when large offerings from U.S. consumer companies have virtually dried up. Only five have listed this year, according to Thomson Reuters data.
"The company has the bad luck going public after two weeks of market decline in the United States," said Jay Ritter, a University of Florida IPO expert.
"Also, the company is fairly priced to give it a valuation of $6.70 billion plus $2.50 billion in debt," he said.
The Coty IPO is the third-largest in the United States this year after Pfizer's animal health unit Zoetis Inc and financial services provider ING US Inc.
It was also the biggest offering by a consumer products company since luxury accessories maker Michael Kors Holdings Ltd's $944 million IPO in December 2011.
J.P. Morgan, BofA Merrill Lynch and Morgan Stanley are the lead underwriters to the Coty IPO.
Coty shares were down 1 percent at $17.32 in afternoon trading. The stock was the most traded on the NYSE, with about 21 million shares changing hands.